Multiple Trusts and IHT Planning

Back in June last year we published an article about the HMRC planned changes to IHT taxation of trusts.

The original consultation paper on this subject was published by the Treasury in 2013 and planned to put legislation in force to deter inheritance tax (IHT) mitigation through the use of multiple Pilot Trusts.

Prior to the new legislation coming into force an individual could set up two or more Nil rate band (NRB) discretionary trusts on different dates with a small amount of capital, often referred to as trust de minimis.

Once these pilot trusts were in force as part of an individuals estate planning, upon death that persons Will would then settle large amounts of capital into the trusts.

In most cases, the capital would be spread evenly across all trusts and applied all on the same day meaning all of these trusts would benefit from the (NRB) individually.

George Osborne’s summer 2015 budget confirmed that estate planners can still continue to use multiple trusts to mitigate inheritance tax, provided they are set up and funded on different days.

Individuals who settle multiple trusts will no longer have an unlimited number of (IHT) nil rate bands, however, they can still settle property up to the value of the (NRB) into trust every seven years.

Under the changes, each of the trusts can still claim its own nil rate band but the calculation of the tax rate now has to take into account the value of the assets added to the other trusts on the same day.

In the event of death, a Will would direct the assets to the trust on the same day so this effectively cancels out most of the benefits of having multiple nil rate bands.

(NRB) trusts are also subject to (IHT) charges every 10 years from creation and also when funds are distributed by them. The rate at which they pay tax is calculated taking into account the nil rate band applicable at the time and the history of transfers made by the settlors in the seven years before the trust was created.

The new legislation changes apply from 6th April 2015 to all IHT charges arising on trusts to which ‘same day’ transfers have been made, but trusts established before 10th December 2014 are protected, provided the settlor has not made further ‘same day’ additions to them since that date, or if the additions do not exceed £5,000.

There is transitional protection for those who make transfers into multiple trusts on death, provided their wills were drawn up before 10th December 2014; the new rules will not apply to the trusts where death occurs before 6th April 2017.