Reporting chargeable lifetime transfers

Summary

Where assets are held under ‘relevant property’ trusts, i.e. most discretionary trusts and post 21 March 2006 flexible interest in possession trusts, a chargeable transfer to inheritance tax (IHT) arises when property enters or leaves the trust. A charge also applies on each 10th anniversary of the trust. Failure to report to HMRC when required can result in fines or penalties being imposed.

Facts and analysis

The relevant Statutory Instruments that deal with these requirements are the Inheritance Tax (Delivery of Accounts) (Excepted Transfers and Excepted Terminations) Regulations 2008 and the Inheritance Tax (Delivery of Accounts) (Excepted Settlements) Regulations 2008.

These regulations include different tests depending on whether the transfer consists of cash or quoted shares/securities, or any other asset (such as life insurance policies/bonds, for example).

The Regulations set out the conditions for:

• A transfer to be an "excepted transfer" i.e. a Chargeable lifetime transfer (CLT) that does not require the delivery of an account;
• An "excepted termination" i.e. the termination of a "qualifying" interest in possession (IIP) subsequent to the Finance Act 2006 changes to the IHT treatment of IIP trusts where delivery of an account is not required;
• An "excepted settlement" i.e. one that does not require the delivery of an account i.e. at 10 yearly anniversaries and on distributions
  
  

Excepted transfer

This topic deals with CLTs, such as a gift into a trust other than a bare trust, and so will be of most interest to Financial Advisers involved in IHT planning.

A transfer is an excepted transfer (so no account required) where the value transferred does not exceed the following upper limits.

• Where the value transferred is in the form of cash or quoted shares/securities, that value, together with the transferor's CLTs in the previous 7 years does not exceed the nil rate band for the year in which the transfer is made.
• Where the value transferred is not cash or quoted shares/securities, that value, together with the transferor's CLTs in the previous 7 years, does not exceed 80% on the nil rate band for the year in which the transfer is made.
• Where the assets being transferred is a life assurance policy e.g. an investment bond, whether that will be treated as a transfer of cash will depend on the circumstances. If the insurance policy and trust are completed at the same time, so the policy is placed into trust from the outset, HMRC will treat this as a transfer of cash. However, where the policy is placed into trust at a later date, this is a transfer other than cash and the 80% limit will apply.
  
  

The following table sets out the limits for the 2021/22 tax year. An IHT100 form (plus any related forms) is needed where the value of the CLT exceeds that shown in the table.

Examples

John transfers £350,000 into a Discretionary Discounted Gift Trust and specifies that he wants an 'income' of £16,000 per annum. Based on his age and state of health, the value of his income entitlement (i.e. the 'discount') is £100,000 and the value of the CLT is £250,000

As the value of the CLT is less than the threshold of £325,000 this is an excepted transfer and there is no need to complete an IHT100 (and the ancillary forms).

Mary invests £250,000 into an insurance bond in June 2017. In May 2021, when the value of the Bond is £300,000, she transfers the Bond into a Discretionary Gift Trust (Investments).

As the value of the CLT is more than the threshold of £260,000 (as this is a transfer of an investment bond, rather than cash or quoted securities), this is not an excepted transfer so it must be reported to HMRC.

Excepted termination

This topic deals with changes to qualifying IIP beneficiaries in existing trusts

There is an excepted termination (so no account required) where a qualifying IIP in settled property is terminated and one of the following circumstances applies:

• The termination is wholly covered by an exemption made available to the trustees (i.e. the transferor/beneficiary has given the trustees a notice informing them of the availability of the exemption).
• The beneficiary's interest was attributable to cash or quoted shares/securities and the value transferred by the termination, together with the beneficiary's CLTs in the previous 7 years, does not exceed the nil rate band for the year in which the termination happens (i.e. does not exceed £325,000 for 2021/22).
• The beneficiary's interest was attributable to some other asset and the value transferred by the termination, together with the beneficiary's CLTs in the previous 7 years, does not exceed 80% on the nil rate band for the year in which the transfer is made (i.e. does not exceed £260,000 for 2021/22).
  

Excepted settlement

This topic deals with reporting requirement for trustees of discretionary trusts, such as at 10 yearly anniversaries and when distributions are made to beneficiaries (exits).

The Regulations refer to 5 categories of excepted settlement (i.e. settlements that do not require an account to be delivered). These are listed below

All 5 categories require there to be no qualifying IIP in the settled property.

Also, Categories 2 to 5 require that the value transferred by the notional chargeable transfer does not exceed 80% of the nil rate band i.e. £260,000 for 2021/22.

• Category 1 applies where the settled property comprises only of cash, and the trustees are resident in the UK, and the settlor has not provided any additions to the settled property following the commencement of the settlement (or have created any other settlement on the same day), and the value of the settled property at the time of the chargeable event does not exceed £1,000.
• Category 2 applies to settlements at the first 10 year anniversary chargeable event.
• Category 3 applies to settlements where there is a chargeable event before the first 10 year anniversary.
• Category 4 applies to settlements where there is a chargeable event after the first 10 year anniversary.
• Category 5 applies to age 18 to 25 settlements
  
  

HMRC Forms Required

• IHT100 - Inheritance Tax Account - Used to report any 'chargeable events'
• IHT100a - Gifts and other transfers of value - Used along with IHT100 if you're reporting a gift or other transfer of value on a trust. Supplementary forms may also be required, depending on the type of assets involved, for example Form URL D34 - Life Insurance and Annuities is required where there are any dealings relating to life assurance policies
• IHT100b - Termination of an interest in possession- Used with form IHT100 to report the ending of an interest in possession trust on settled property because the tenant has died or has transferred the assets
• IHT100c - Assets ceasing to be held on discretionary trusts - proportionate charge - Used with form IHT100 if there is an Inheritance Tax proportional charge due because assets have been removed from a discretionary trust.
• IHT100d - Non interest in possession settlements - principal charge (ten-year anniversary)- Used to report property in a settlement that became 'relevant property' after it started but before the 10th anniversary. 
• Forms and further guidance can be obtained at
  https://search2.hmrc.gov.uk/kb5/hmrc/forms/ihtforms.page

Next steps

Familiarise with the Regulations to ensure that necessary guidance is provided:

• Where there may be an impact when trusts are being created as part of inheritance tax advice given
• When reviews of trust are being undertaken, especially when distributions to beneficiaries are being made
• To ensure that Trustees / Settlors meet fully their reporting obligations to HMRC.

This will enable ‘all-round’ support to be provided, not just at the point of creating the Trust.

Important information

The information contained in this article has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2021. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice (Ref 10.4)