| Now that January is over it is time for us to reflect on some of the changes announced by HMRC while we were busy meeting personal tax deadlines. One such change, on 23 January (without much fanfare it has to be said) was to HMRC’s view on the location for inheritance tax purposes of certain specialty debts. What are "speciality debts" you may ask. Speciality debts are debts made by deed. Why did that make a difference? Normal debts are considered to be situated where the debtor resides, but speciality debts were, based on case law and HMRC guidance, situated where the deed was held. Therefore if say a UK resident, was the debtor of an overseas trust set up by a non UK domicile (an "excluded property" trust), then their interest in that trust could be subject to Inheritance Tax to the extent of the debt. However if the debt was set up as a speciality debt then it was understood that it would not be subject to inheritance tax. HMRC guidance now says they consider where the deed is held is irrelevant, what matters is where the debtor resides. This may sound very dry and may only affect a few, but this change could be expensive to beneficiaries of trusts affected. It also came in with immediate effect. The change means that some overseas trusts that have previously been able to claim exemption from the 10 year charge, may, in HMRC’s eyes at least, no longer be able to do so. This charge is currently 6% of the total trust UK asset value over the nil rate band of £325,000. HMRC Guidance is of course, just that. The statutory and case law interpretation has not on the face of it changed and as such, this switch in position is controversial and will be debated. We do note however, that the draft Finance Bill 2013 has (separately?) a draft clause which says that no account is to be taken of the location of a deed under which interest is paid when determining whether income tax is due to be deducted at source on interest payments. A coincidence? We think not. Whatever the current technical debate, HMRC are clearly going to challenge hitherto acceptable arrangements. Taxpayers need to ascertain whether they are affected, and if so, understand the cost and risks involved. Transitional treatments have not been addressed in the HMRC manual , so the position of existing trusts coming up to a 10 year anniversary is unclear. Our advice is not to be hasty, but do check the current status of trusts of which you are the beneficiary. Your normal Hazlewoods contact can help you do this. We, of course, will continue to monitor and feed into the debate. |