Splitting the IHT nil rate band across trusts
As you’re probably aware I’m a great fan of trusts and the additional planning opportunities they offer. In May of this year HMRC issued a consultative document that covered proposals to change the IHT treatment of certain trusts with effect from 6 April 2014. In my view the key impact of this consultation will be the result of the proposed method of calculating the IHT ten-year anniversary charge on certain types of trusts:
The rate of IHT payable on an affected trust should be 0% on the property (e.g. investment) that falls within the trust’s nil rate band and 6% on the property value in excess of the nil rate band; and
the nil rate band (currently £325,000) available to a trust should be determined by dividing the current nil rate band by the number of relevant property trusts created by the same settlor that have been in existence in the last 10 years.
So what does this mean?
So on the basis of these proposals, if someone had already created four trusts in the last ten years, the nil rate band available to a fifth discretionary trust in the future would equal one fifth of the nil rate band.
This is quite alarming. If this proposal were implemented then it would effectively neutralise the current ‘Rysaffe planning’ which works on the basis that trusts created on different days are not related for IHT purposes, so each trust qualifies for a full nil rate band.
The proposal also takes no account of the value of assets held in any existing discretionary trusts. This means that a discretionary trust with negligible value could be entitled to the same share of the nil rate band as a discretionary trust comprised of high value property.
Furthermore, in theory all active discretionary trusts – whenever created – would be taken into account and this could cause a compliance nightmare for trustees who would need details of all other trusts.
In the Autumn Statement the Government confirmed that there will be further consultation on the proposals to split the IHT nil rate band available to trusts with a view to this change being introduced from 6 April 2015. Draft legislation is expected to be included in the Finance Bill 2014.
What does this mean for our clients?
The vast majority of clients with trust arrangements are unlikely to need to take any action. For example, this proposed legislative change won’t impact those clients who have set up family and interest in possession trusts to receive their assets on death via their wills, until after death. Furthermore, if the money in a trust has been loaned out to the beneficiaries, there is in essence no value to the trust and hence no ten-year charge becomes payable.
Up until this point when we have arranged large life policies with benefits in excess of £1m we often advised splitting the benefit payments across three different trusts. This type of planning may not be effective going forward. But in my view, trusts still offer significant benefits and different trusts are normally established to achieve different financial planning objectives, so it is important to continue to incorporate trust planning within any financial planning we undertake.
If you are in any doubt about your arrangements don’t hesitate to give me a call.
Capital Gains Tax Annual Exemption
The annual exempt amount will increase from £10,900 to £11,000 for tax year 2014/15 and will increase to £11,100 for tax year 2015/16.
The revised annual exempt amounts for trustees will be £5,500 and £5,550 respectively.
As always I will keep myself and yourself up to date with this legislation as it unfolds.