A number of trusts, known as “relevant property trusts” holding assets within their trust funds escape a 40% IHT liability on the death of the estate planner, but for inheritance tax which is chargeable (during the estate planner’s lifetime and upon death) when assets enter the trust (entry charge at the lifetime rate of 20%), or are distributed to beneficiaries (exit/ proportionate charge) and also a time-based charge every ten years (the ten year anniversary/periodic charge) where no inheritance tax would otherwise be payable simply because distributions are deferred indefinitely.
The ten year anniversary charge is calculated on the value of the assets within the trust on each ten-year anniversary of the creation of the trust. The exit charge is a time apportioned charge which is triggered when assets are appointed or transferred out of the trust.
The formula for the calculation of these two charges was complex and cumbersome, and the inheritance tax yield for the effort has to date been modest. They are based upon the estate planners applicable “nil rate band” (currently £325,000).
A number of consultations culminating in the third consultation of June 2014, intended that new rules would apply to all new trusts created after 6 June 2014 or property added to certain existing trusts after that date. It was proposed that an estate planner would have a nil rate band for his trust(s) called a “settlement nil rate band” (SNRB), equivalent to and separate and distinct from his or her personal nil rate band. Where the estate planner created more than one settlement, he or she would elect that a proportion of the nil rate band on a percentage basis be allocated between such settlements. That election was to determine the applicable nil rate band component for the purposes of calculating the ten year anniversary and exit charges.
Following the Government’s Autumn statement in December 2014, these proposals for a single nil rate band have now, unexpectedly, been dropped. Instead new anti-avoidance rules have been incorporated into Finance Bill 2015 to prevent estate planners using a number of trusts set up on the same day (often referred to as “pilot trusts”) with nominal amounts initially gifted into trust, with a view that such trusts can be further funded by gift or by will in the future, utilising multiple nil rate bands to reduce inheritance tax applicable to the ten year periodic charge.
Under the new rules, where property is added to multiple trusts on the same day, the trusts are treated as “related” and the value of the property so added across those settlements is aggregated for the purpose of calculating the relevant tax rate applicable for the IHT ten year anniversary charges and the exit charges. Planning around pilot trusts to reduce the 10 year anniversary charge through the application of multiple nil rate bands is no longer effective. There may be non-tax reasons for retaining or establishing such trusts.
One particular tax planning advantage which seems to remain effective, despite the changes, is in respect is the gifting of surplus income to multiple trusts. Provided that such income qualifies as exempt from IHT as falling within “normal expenditure” it is both exempt from IHT and the unrelated gifts of surplus income occurring in different fiscal years to different trusts falls outside the “same day” nexus that the new rules are designed to counter.
Estate planners are still able to settle the equivalent of his or her nil rate band every seven years to a relevant property trust.
The new rules will apply from 6 April 2015 in respect of relevant property trusts created on or after 10 December 2014. It will also extend to relevant property trusts created before 10 December 2014 where additions are made to more than one trust on the same day. They will not apply in respect of any will executed before 10 December 2014 and in respect of any deaths before 06 April 2016, giving any testator a window of opportunity to change his or her will leaving assets to multiple trusts.
Additionally, there are some technical amendments to the rules for calculating the ten year and exit charges which will make the computations much simpler. With effect from 6 April 2015, it will no longer be necessary to take account of the non-relevant property as distinct from “relevant property” in calculating the IHT on the tenth anniversary or for the purposes of the exit charge where trust property is distributed.
Regrettably, the simplified flat rate charge of 6% to calculate the ten year anniversary and exit charge as originally proposed with effect from June 2014 has not been carried forward to the Finance Bill 2015.
James Wolfson’s Comments:
The Government’s surprising reversal of the June 2014 proposals may be indicative of uncertainty and a state of flux regarding these reforms. There could be further changes before the Finance Act 2015 is published. It is advisable to adopt a “wait and see” approach before definitive restructuring of existing arrangements or ruling out particular planning involving multiple trusts before the legislation is final.
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