HMRC consultation on IHT trust charges

Putting it simply a trust enables you (the settlor) to pass money or other assets to trustees (selected by yourself) which they are then responsible for managing for the benefit of the trust beneficiaries (also nominated by you). There are a wide variety of trusts available however it is important to stress that in most circumstances you will be giving up access to your capital as well as any growth in its value.

For most trusts established after 21 March 2006 a transfer of money or other assets will constitute a chargeable lifetime transfer (CLT) and, if the value of the gift plus other CLTs made in the previous 7 years exceeds the nil rate band (currently £325,000) then the excess can be subject to an IHT charge. Should death occur within 7 years of the gift additional IHT may also be payable.

There are a wide variety of trusts available however it is important to stress that in most circumstances you will be giving up access to your capital as well as any growth in its value.

In addition to this, there may also be an IHT charge based on the value of the trust assets every 10 years and if capital leaves the trust. Broadly, this is calculated as 6% of the amount that exceeds the nil rate band (NRB), although calculations can be more complex than this.

Under the existing rules, the nil rate band available to a trust is reduced to take account of other trusts created by the same settlor on the same day (related settlements), and any other chargeable transfers made in the seven year period prior to the creation of the trust.

On 6th June HMRC published their 3rd consultation document covering proposals for reforming the basis on which IHT charges are calculated for ‘relevant property trusts. As just alluded to, in certain circumstances calculations can prove complex as trustees need details of related settlements and transfers made before the trust was established, so the aim is to make these calculations much more straightforward for trustees.

However, the proposed changes also have a direct impact for financial planning as under the current provisions each trust established by an individual essentially has its own ‘nil rate band’. Under the proposed changes individuals will have a ‘settlement nil rate band’ (SNRB) which they would have to allocate between all the trusts they establish after 6 June 2014.

What do these proposals mean?

Individuals who create a number of trusts will find that the trust IHT charges are much more of an issue to consider.

Not only will decisions need to be made on how to allocate the SNRB to new trusts but care will need to be taken around amending or adding further property to trusts set up pre-7th June 2014 as this will trigger the new rules to apply to that trust.

Some of the key issues that may need to be considered are:

Lump sum gifts

It will still be possible to gift an amount up to the nil rate

band every 7 years without an immediate IHT charge. However, where settlors have more than one ‘relevant property trust’, the trusts could end up paying more IHT under these proposals than under the existing rules.

Life assurance

Any trusts of life policies established after 6 June 2014 will be subject to the new rule as per any other ‘relevant property trusts’ set up after this date. Usually a life policy will have a nil or negligible value although if you are in ill-health at the time of the trust’s decennial anniversary the policy could be deemed to have a ‘market value’. Likewise, if there is a claim on the policy the trust would then hold the proceeds and have a value.

So, whilst it may not be necessary to initially allocate any of an individual’s SNRB to a trust that holds a life policy, in the above circumstances action may need to be taken to allocate a percentage of the SNRB to the trust at a later date in order to mitigate the impact of any periodic IHT charges.

If the proposals go ahead it will also no longer be possible to split a larger sum assured into a series of smaller policies in separate trusts in order to mitigate trust IHT charges.

Pensions

A common financial planning option to protect pensions from IHT is to establish a pilot trust to receive any lump sum death benefits from a pension scheme in the event the member dies before taking benefits. These are often referred to as ‘spousal bypass trusts’ as it means that the death benefits are paid to the trust rather than (as is usually the case) the surviving spouse, the objective being that the death benefits do not then form part of the estate of the surviving spouse on their subsequent death. These trusts are typically set up during a members lifetime with a nominal amount (for example £10).

The good news, however, is that the relevant date for the purposes of the new proposals will usually be the date the member joined the pension scheme, rather than the date the spousal bypass trust is established, so it may still be advantageous for you to consider establishing such a trust now, even though these would be effected after 6 June 2014. The proposals will still have an effect, however, on spousal bypass trusts used in connection with a pension scheme that the member joined after 6 June 2014 or where the scheme is established by deed- poll rather than a trust-based arrangement. This can be a complex area and you should seek guidance based on your circumstances.

Summary

The percentage of the SNRB allocated to a trust can be increased, reduced or withdrawn altogether until the first occasion of charge in respect of the trust in question but cannot be reduced after that point. This first occasion of charge will normally be the first ten-year anniversary of the trust or an earlier exit of capital from the trust.

It is important to stress that these proposals are still at the consultation stage and therefore still potentially subject to change, however it is important for all individuals considering making use of trusts how these changes will affect any planning.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor