Multiple-trust IHT planning restricted but still possible
It was confirmed in last week's Budget that estate planners can 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 inheritance tax (IHT) nil-rate bands, but they will be able to settle property up to the value of the nil-rate band into trust every seven years.
The measure limits the use of the established 'Rysaffe' tax planning strategy under which a settlor could create multiple pilot trusts and settle a fraction of his or her estate into each one. In such a scheme, each such trust was entitled to its own full IHT nil-rate band, provided the trusts were established on different days.
Originally, in a 2013 consultation, the Treasury proposed blocking this type of IHT planning by splitting a single inheritance tax nil-rate band among all trusts set up by an individual. The following year this proposal was modified to introduce a single 'settlement nil-rate band' to be divided between all of an individual settlor's trusts. However, last December's Autumn Statement announced that this idea would, in turn, be dropped in favour of a targeted anti-avoidance rule, to be implemented in the Finance Act 2015 but taking effect from 10 December 2014.
The new legislation, to be published on Wednesday (15 July), is slightly modified from the draft form published in the 2014 Autumn Statement, to take account of consultation responses. It amends s62 of the Inheritance Tax Act 1984, adding a new rule stating that: 'where property is added to 2 or more relevant property settlements on the same day and after the commencement of those settlements, the value added to the settlement together with the value of property settled at the date of commencement (that is not already in a related settlement) will be brought into account in calculating the rate of tax for the purposes of 10 year charges under section 66, for exit charges before the first 10 year anniversary under section 68 and for exit charges between anniversaries under section 69'.
The rule will apply to all charges arising after the Finance Bill is enacted, for trusts created on or after 10 December 2014. It also applies to trusts created before 10 December 2014 where there are additions made on or after 10 December 2014 to more than one relevant property trust on the same day. However, it will not apply to a will executed before 10 December 2014 provided the testator dies before 6 April 2017. This will prevent unwanted tax consequences arising where minor or unrelated changes to the will are made in the excluded period.
- The new legislation also simplifies the calculation of ten-year anniversary IHT charges on trusts, by removing the need to include non-relevant property in the calculation, regardless of when the trust was created.
- HM Revenue & Customs
- FT Adviser
- STEP news story (11 December 2014): Draft legislation to block multiple-trust IHT planning
- STEP news story (4 December 2014): Treasury drops plan to share single IHT nil-rate band across all settlements
- STEP news story (9 June 2104): HMRC airs Plan B for splitting IHT nil-rate band across trusts
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