Q&A: inheritance tax for trustees selling assets

In our regular Q&A series from Croner Taxwise, David Woolley examines whether trustees pay inheritance tax on assets when closing accounts

Q. I am assisting the trustees of a discretionary trust in bringing the trust to an end by distributing the remaining cash and assets to various beneficiaries. This involves inheritance tax (IHT) payable on the exit charges and the trustees would like certainty that HMRC will agree the IHT position without any future tax exposure for the trustees.

A. Unlike the self assessment regime, HMRC does not issue notices to file an IHT return, instead there is an obligation placed on the person concerned to file an IHT return if they fall within one of the various scenarios in s216 IHTA 1984. Therefore there are no equivalent rules regarding time limits for enquiries.

An application can be made for HMRC to issue a ‘certificate of discharge’ under s239 IHTA 1984. However, HMRC does not have to issue such a certificate except where the transfer is made on death. Even if HMRC was willing to issue such a certificate to trustees, an application (on form IHT100) can only be made after two years from the date of transfer – unless HMRC can be persuaded to agree an earlier date. HMRC refers to these certificates as ‘clearance certificates’ and HMRC’s guidance can be found in their Inheritance Tax Manual at IHTM40000.

HMRC has published some guidelines on their processes and timescales in the April 2018 edition of their Trusts and Estates Newsletter but unfortunately these only referred to return processing for transfers on death.

There is no legislative HMRC IHT enquiry regime as such. Instead s217 IHTA 1984 imposes an obligation on the person who filed the IHT return to tell HMRC of any defective accounts they have filed. S221 allows HMRC to issue a ‘notice of determination’ to determine a particular matter which is then subject to an appeal procedure.

Even then, under s240 HMRC can start proceedings for the recovery of underpaid tax within 4 years of the later of the date the last IHT payment was made or the date on which the last IHT instalment was due. The four-year time limit is increased to six years and 20 years for a loss of tax brought about carelessly or deliberately respectively by the person filing the return (or a person acting on their behalf e.g. an agent).

In view of the above it is often advisable for the trustees to enter into some form of indemnity with the beneficiaries or, for added certainty, to retain the transferred assets within bare trusts for the beneficiaries until the IHT position can reasonably be assumed to have been finalised.

About the author

David Woolley is a Tax Advice Consultant at Croner Taxwise, tel: 0844 892 2470

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