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IHT  •  Personal tax  •  Probate and Inheritance Tax

Use of multiple pilot trusts for IHT planning to be restricted by new proposals

By Lesley Stalker on 29 July, 2014

According to forecasts issued by the Treasury, the number of households affected by inheritance tax will increase by 35% this year to 35,600 and then jump to 43,811 next year. Over the next five years, around 262,000 families will find themselves within the charge to inheritance tax; presumably as a result of rising property prices.

There are frequent rumours that inheritance tax (IHT) will be reformed, and whilst this has not materialised in relation to individuals, we have seen changes to the rules in relation to trusts in recent years. It appears the focus on trusts is set to continue with an announcement in the chancellor’s autumn statement in December 2013 that the government is to further consult on proposed changes to the rules governing trusts.

In particular this will affect pilot trusts which are long established tax planning vehicles; the proposed changes will mean the tax reductions they offer will no longer be available.

Assets settled on trust are subject to a maximum 6% IHT charge on every 10 year anniversary, together with an exit charge when assets leave the trust, based on the value of the assets in the trust, after taking into account the nil rate band available.

Currently each trust has its own nil rate band which is reduced to take into account all chargeable lifetime transfers made by the settlor on the same day as, or during the 7 years before, the trust is set up. As a result, multiple trusts created by an individual on the same day (typically under the terms of a will) must share that individual’s IHT nil rate band equally, and as a result, assets of a lower value will become chargeable to the 10 year and exit charges.

In order to avoid this, separate trusts – ‘pilot trusts’ can be set up on different days during a settlor’s lifetime, with nominal amounts settled on them. Because they are not created on the same day, they are not ‘related settlements’ for IHT purposes, and because only nominal amounts are settled on each trust, each is effectively entitled to its own unrestricted nil rate band. There is no limit on the number of trusts that can be set up in this way and so in theory, by setting up any number of trusts it is possible to avoid future IHT charges on assets of any value.

In order to take advantage of this, an individual will establish a number of ‘pilot’ trusts and at some point in the future, on the same day - for example by settlement in a will - will add assets up to the value of the nil rate band to each trust.

There have been a number of proposed measures suggested by HMRC which they say are proposed in order to simplify the trust tax regime; however the anticipated outcome is that the tax planning opportunities offered by pilot trusts will be removed and this will be achieved by splitting a trust’s nil rate band between all trusts created by the same settlor.

The effect of these proposals is likely to be that lifetime gifts become a more widely attractive IHT planning choice. However, as the Telegraph has suggested, this could have its own problems and “make it easier for young people to blow their parents’ or grandparents’ wealth by giving them access to large sums of cash before they are old enough to handle the responsibility”.

Although the consultation is still underway and will not close until August 29th, this whole issue has been a long running debate and it is expected that the new rules will become operative by April 2015. To ensure there is not a flurry of activity amongst taxpayers trying to avoid the new rules, the Government has confirmed that trusts created between now and April 2015 will be subject to the proposed new rules. 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.

Our advice if you are considering options for inheritance tax planning, is to take professional advice sooner rather than later. Although it is not possible to create pilot trusts now to avoid the new rules, there are other opportunities for inheritance tax planning. Please contact Lesley Stalker by emailing las@rjp.co.uk.

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