Changes to the Ongoing Taxation of Trusts … back where we started?

Consultations on how to simplify trust taxation abruptly ended after a shock announcement from HMRC in June 2014.

The announcement severely limited the effectiveness of putting more than one trust in place. Prior to this announcement, each trust has what is equivalent to its own nil rate band, which if planned correctly, can be £325,000 (at the current level).  If a trust's total assets are worth less than this amount, then it could avoid ongoing Inheritance Tax charges altogether.

One common strategy was to create multiple trusts during lifetime, each with a nominal sum of £10, and then gifting substantial assets into these trusts by Will. This had the potential to save the 6% ongoing Inheritance Tax charges incurred every ten years by most trusts.

The Revenue sought to prevent people taking advantage of this strategy, but in doing so also prevented much more benign planning, such as gifting assets to trusts every seven years.

After much criticism of this proposal, the Revenue unexpectedly backtracked and abandoned its proposals, leaving most Inheritance Tax planning using trusts as still effective.  Legislation was proposed limiting the tax effectiveness of leaving assets to multiple trusts by Will, but the March 2015 budget postponed the legislation putting these changes into effect. 

The current position

It appears that settling multiple trusts, each with its own nil rate band will still be possible, but adding assets to more than one trust on a single day would usually trigger a reduction in each trust's nil rate band.

Paul comments: "There are some limited grandfathering provisions for those people with Wills already in place, but this will only cover people who die before 6 April 2017.  Given that the government will re-draft this proposal, there is always the risk that there may be more surprises in store."

"Given how recent proposed changes were put in place without warning, I would recommend people to take any planning steps earlier rather than later.  When changes are eventually introduced, it is expected that they would not affect existing trusts, unless new assets are added."

"I would be happy to talk to anyone who is concerned how their family trusts will be taxed, or how further settlements should be structured."

March 2015