Capital taxes

Inheritance tax (IHT) nil rate band

The inheritance tax nil rate band will increase to £285,000 from 6 April 2006. The nil rate bands have been set for the following three years, at £300,000 for 2007/08, £312,000 for 2008/09 and £325,000 for 2009/10.

Inheritance tax treatment of trusts

From 22 March 2006, interest in possession (IIP) trusts and accumulation and maintenance (A&M) trusts will be subject to the same IHT rules as discretionary trusts, although there will be a few exceptions. This means:

• Payments into the trust will be chargeable transfers, with a possible immediate 20% IHT charge;
• A periodic charge will apply every ten years at a rate of up to 6%; and
• There will be an ‘exit charge’ proportionate to the periodic charge when funds are removed between ten-year anniversaries.

The current, more favourable IHT treatment will continue for A&M trusts created before 22 March 2006 which provide for assets to go to a beneficiary absolutely at age 18 – or where the terms of trusts are modified to do so before 6 April 2008.

The current IHT rules will also continue for IIP trusts created before 22 March 2006, until the interest in the trust property comes to an end. If, at that point, the property remains in trust, this will be treated as a creation of new settled property. If the termination occurs during the lifetime of the person beneficially entitled, this will be a chargeable transfer. If the interest ends on death, the settled property will form part of the beneficiary’s estate (as now) and the trust property will become subject to the new regime. There are exceptions for charities. In both cases, periodic and exit charges will apply.

The new rules will not apply to certain trusts, eg those created for a disabled person or set up by a parent on death for a minor child who becomes fully entitled to the trust assets at age 18.

As a consequence of these revisions, transfers into and out of trusts will potentially be eligible for capital gains tax holdover relief.

Stamp duty land tax threshold

The threshold for stamp duty land tax (SDLT) on residential property transactions is increased to £125,000 from 23 March 2006. The rates and other thresholds are unchanged.

SDLT simplification and clarification

Certain forms of consideration will be treated as not chargeable from 12 April 2006. They include payment by a donee or beneficiary of capital gains tax or inheritance tax on a gift, as well as payment of a landlord’s costs on a grant, variation or termination of a lease.

There will no longer be a charge to SDLT on the transfer of an interest in a trading partnership where the partnership property includes land, except where the partnership trade consists of developing or dealing in land. This and several other simplifications will take effect from the date of Royal Assent.

Alternative finance arrangements

The existing SDLT reliefs for alternative finance arrangements (eg those used by Muslims) available to individuals, will be extended to companies, trusts and clubs from the date of Royal Assent. The reliefs ensure that the SDLT payable is no more than would be due under standard loan finance arrangements.

SDLT– unit trusts

SDLT relief is withdrawn on the transfer of property into a newly formed unit trust for the issue of units. The change affects transfers from 22 March 2006, with transitional provisions to protect contracts entered into before 2pm on 22 March 2006.

Stamp duty reconstruction relief

Two extensions will be made to the relief from stamp duty for certain company reconstructions and acquisitions. The acquiring company will no longer have to be registered in the UK. The strict rules concerning the proportion of shares held by any shareholder will be relaxed so that relief will be given provided that, as near as practical, there is no change in overall ownership of the reconstructed business.