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Business Tax  •  HMRC  •  IHT  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning

Pilot trusts update: when is a government U turn not a U turn?

By Lesley Stalker on 23 January, 2015

Reports have been circulating that the government has made a U-turn on its proposed new legislation to restrict the use of pilot trusts. Whilst consultation responses have indeed persuaded the government to change its course on this proposed legislation, it has said it will still target the use of pilot trusts, but will look for different ways to do so. In fact therefore, this is less of a U-turn and more of a ‘full steam ahead’ in terms of the impact it has on taxpayers looking for inheritance tax planning opportunities.

It has previously been a popular tax planning strategy to establish multiple pilot trusts, each set up on consecutive days with a nominal investment (typically £10), and each would have its own nil rate band for inheritance tax purposes. It was then possible to add assets to each trust on the same day, through a will settlement on death, and significantly reduce inheritance tax liabilities.

This practice became regarded by HMRC as an abuse of the rules and a consultation was opened by the government to gather views on proposed reforms. We originally blogged about this in 2014: https://www.rjp.co.uk/2014/07/29/use-multiple-pilot-trusts-iht-planning-restricted-new-proposals/.

Then, hidden in the detail within the 2014 Autumn Statement was confirmation that the proposals to restrict the use of pilot trusts would be abandoned, because of a belief that it would have ‘far reaching consequences’; HMRC have said that they do not wish to discourage the use of trusts, because most are not created purely for tax planning purposes.

What this means in practice is that pilot trusts are technically still available for use, but they are subject to some very restricting new rules, which were announced at the time of the 2014 Autumn Statement; additions made to more than one settlement on the same day will have to be aggregated, effectively blocking their use.

There is one very narrow caveat where property is added to pilot trusts by will before 6 April 2016 (i.e. the settler dies before that date) and the will was executed before 10 December 2014. This hardly constitutes useful tax planning however.

The advice given by the government when they opened the consultation was to expect any trusts created between June 2014 and April 2015 to be subject to new restricted rules; unfortunately we don’t know at this stage whether this advice also applies to the predicted replacement new rules. So in fact we do not have a ‘U-turn’ – we have a period of uncertainty whilst we await the new proposals. This uncertainty affects not only the establishment of new trusts, but also what to do with existing trusts. Sounds confusing? We think so too, and as a result, pilot trusts are no longer really a viable tax planning option.

Note that trusts which were created before 6th June 2014 with assets of less than the nil rate band are unlikely to be affected and it is anticipated that they will remain exempt from inheritance tax.

Inheritance tax planning remains a difficult area with much uncertainty surrounding trusts and the likelihood of the current tax free threshold of £325,000 being increased. Perhaps the latter will be a carefully timed electioneering announcement timed for maximum impact in the run up to May’s general election. We will have to watch this space and see. In the meantime, if you want to discuss inheritance tax planning and the options available, please contact Lesley Stalker by emailing las@rjp.co.uk.

 

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