Finance Bill limits multiple trust planning

Finance Bill limits multiple trust planning

The Finance Bill confirms that proposals to introduce a ‘settlement nil rate band’ will not go ahead. This is good news for mainstream estate planning advice using trusts with life assurance contracts and pensions. Such trusts should not now become saddled with the burden of tax compliance and reporting. For many, it will be business as usual.

However, legislation will be introduced that will hit those who seek a tax advantage through the use of some multiple pilot trusts.

For those that have been keeping abreast of the story so far, the introduction of a ‘settlement nil rate band’ was the 3rd in a series of proposals aimed at simplifying the IHT treatment of relevant property trusts and dealing with a perceived tax avoidance issue. This would have achieved the aim of ending the practice of creating multiple lifetime ‘pilot’ settlements each potentially with their own ‘full’ nil rate band. But it would also have had wide ranging implications for more mainstream trust planning, and thankfully, this is not the route that will be adopted under the draft Finance Bill.

Instead, the Government will achieve their aim in a different way. From 10 December 2014, where a settlor adds funds into more than one existing trust on the same date, those trusts will be treated in a similar way to ‘related settlements’. The value of these ‘same day addition’ trusts will be aggregated with each trust’s own value to establish the rate of tax payable at each tenth anniversary and when capital leaves the trust.

It would however seem that multiple trusts established on separate days with low value/exempt transfers and no “same day added property” will continue as before.

Example:
Prior to his death Robert set up 5 discretionary trusts on consecutive days, each holding just £10. In his Will, Robert left an estate of £1M to be split equally across the 5 trusts.

Before Finance Bill changes:
The benefit of this under the ‘old’ rules would have been that each trust holds £200,010 and each would have had a full nil rate band (currently £325,000). When calculating the IHT due at the 10th anniversary or when capital leaves the trust, the value of the other trusts are ignored. Compare that with the same £1M paid into 5 separate trusts created in Robert’s Will (where no existing series of £10 trusts existed) which would have all been classed as ‘related settlements’, i.e. settlements created on the same date – in this case Robert’s death. The value of each related trust (in this case £800,000) is aggregated with each trust’s own value to establish the rate of tax payable at each tenth anniversary and when capital leaves the trust. You can see where the tax advantage lies.

After Finance Bill changes:
Under the new rules, the setting up of 5 trusts on consecutive days during his lifetime, and then paying in an additional £200k to each on Robert’s death, will be treated in a similar way as if he had created the 5 related settlements in his Will. When calculating the rate of IHT to be charged on 10 yearly anniversaries and exits for each trust, the value of the other trusts will be taken into account because although the trusts were created on separate days, the new money was added on the same day i.e. date of death.

The new rules will apply to trust IHT charges after 6 April 2015 where additional property is added to multiple trusts at the same time, on or after 10 December 2014. There is, however, a measure of protection from the new rules for clients with Wills executed before 10 December 2014 and who die before 6 April 2016.

Trusts which have already received same day additions before 10 December 2014 will also be protected from these new rules.

Effect on estate planning
The changes should mean that most existing planning should be unaffected. Anyone who set up multiple pilot trusts with the intention of using their Will to add funds on their death may want to reassess whether this still meets their intentions in light of the possible IHT charges which these trusts may face.

Life assurance
Most mainstream planning involving the use of trusts with life assurance policies will be largely unaffected. Neither premiums paid on policies, nor the death benefits from a whole of life or term assurance policy, will be regarded as additions to the trust but merely a change in the underlying value of the trust assets.

Bypass Trusts
Pension death benefits paid into a Bypass Trust will not be an addition where they are paid from a trust based scheme. These remain treated for IHT as if they are still in the original trust; the pension scheme trust which the funds originated from. Where there have been consolidations this can still mean there are multiple nil rate bands available.

However, death benefits paid from a contract based pension to a bypass trust will be an addition to a trust. Splitting the death benefit into several bypass trusts will bring the ‘same day’ additions rule into play.

Lifetime gifting
The use of trusts for lifetime gifting, such as gift trusts, discounted gift trusts and loan trusts, can continue to be used without any real impact. Setting up a number of trusts on consecutive days will still see each trust have its own nil rate band, but in the case of gift trusts and discounted gift trusts, the available nil rate band will be reduced by any earlier chargeable transfers.

This erodes the benefit of creating multiple trusts as the later trusts may have no nil rate band left and will pay the full 6% on the trust value at the tenth anniversary. This is not new, and has always been an automatic deterrent for IHT.

 

Source: Standard Life