Finance Bill 2013 now in force – inheritance tax; taxation of trusts for vulnerable beneficiaries; new statutory residence test; general anti-abuse rule

The Finance Bill 2013 received Royal Assent on 17 July 2013 triggering a number of private client measures to come into force. Please read on for a summary of the changes.

The widely debated Finance Bill 2013, now the Finance Act 2013, (the Act) received Royal Assent on 17 July 2013, which triggered the implementation of a number of legal changes affecting private clients, although some measures take effect from an earlier date. The main changes concerning private clients and their advisors are as follows:

Rules restricting liabilities that can be deducted for inheritance tax purposes

The Government has over the past two years been attempting to crack down on (inheritance) tax avoidance schemes and the new provisions in the Act consolidate its stance by preventing the purported tax advantages from applying under such schemes.

Inheritance tax is normally charged on the net value of a deceased person’s estate after taking into account liabilities outstanding at the date of death, subject to deduction of any reliefs, exemptions and the available nil-rate band (currently £325,000). Reliefs such as business property relief, agricultural relief and woodlands relief, serve to reduce or even eliminate inheritance tax on particular assets.

There are a number of liabilities which are now prevented from being deducted from the value of assets for inheritance tax purposes under clause 174 and schedule 34 to the Act. These sections of the Act amend the Inheritance Tax Act 1984 so that liabilities attributable to financing the acquisition, maintenance or enhancement of the value of excluded property (i.e. certain types of property which are excluded from inheritance tax) or assets that qualify for business property relief, agricultural relief or woodlands relief cannot be used to offset inheritance tax.

Provisions implementing changes to the taxation of trusts for vulnerable beneficiaries

Tax legislation makes special provision for certain types of trust for vulnerable persons, such as trusts for minor beneficiaries and disabled beneficiaries. In the case of minor and disabled beneficiaries, the special treatment is that the trust is taxed (in most respects) as if the trust assets belonged to the beneficiary, which confers a special and more favourable taxation regime. However, the qualifying conditions for these types of trust are restrictive.

The Act seeks to harmonise restrictions placed on the application of capital and income from trusts for vulnerable persons imposed by the income tax, capital gains tax and inheritance tax legislation.

It also includes in the definition of ‘disabled person’ those who are receiving the new Personal Independence Payment (which is to replace Disability Living Allowance).

The new statutory residence test (SRT) for individuals (came into force 6 April 2013)

The Government considered the pre-Act rules regarding residence to be complex, outdated and uncertain. Therefore, a new statutory residence test has been implemented and been in force since 6 April 2013.

The general anti-abuse rule (GAAR)

The GAAR rule will apply to all arrangements entered into on or after 17 July 2013 which are ‘abusive’ and involve the following taxes:

  • Income tax;
  • Capital gains tax;
  • Inheritance tax;
  • Corporation tax;
  • Petroleum revenue tax;
  • Stamp duty land tax; and
  • The annual tax on enveloped dwellings.

The objective of the GAAR is to deter taxpayers from entering into abusive arrangements, and to deter would-be promoters from promoting such arrangements. HMRC guidance confirms that a tax arrangement will generally be viewed as an arrangement which has the objective of obtaining a tax advantage. There are some safeguards for individuals, namely requiring HMRC to establish that the arrangement is abusive and a double reasonableness test, which requires HMRC to prove that the arrangements “cannot reasonably be regarded as a reasonable course of action”.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised this article please contact the author or call 0207 404 0606 and ask for your usual Goodman Derrick contact.

If you have any queries or would like to discuss this further, please contact Ian Bradshaw, Head of Private Client on ibradshaw@gdlaw.co.uk.