June 27, 2013

On 31 May 2013 HMRC released a consultation document proposing a “simplification” of the way in which inheritance tax (“IHT”) is charged on trusts. The consultation contains a number of suggested amendments with the most significant being a proposal to amend the way in which the nil rate band is applied to trusts. This will be of particular interest to those who have established pilot trusts.

Generally, when a trust is established an IHT charge arises on the Settlor (or his estate if the Settlement is created on death) subject to the availability of the nil rate band. Additionally trustees will be subject to IHT when funds leave the trust and on each tenth anniversary of the date the trust was created. In calculating these charges the trust is entitled to a nil rate band on which no IHT is due.Some individuals currently choose to settle a small amount (say £10.00 or £100.00) into a number of trusts set up on different days so as to maximise the nil rate band available to each trust. Currently further amounts can then be added to these settlements, either during the individual’s lifetime or in his will. Each settlement would be entitled to its own full nil rate band.

The consultation proposes to change this so that the nil rate band would be split between all trusts settled by the same Settlor which are in existence at any time during a maximum ten year period, including those trusts that have been wound up. There does not appear to be a proposal to have the nil rate band applied on a pro rata basis over each of the trusts, therefore the nil rate band will be divided equally between each of the trusts, no matter the value of the assets contained in each of them. If a Settlor has a number of trusts, one of which contains a lot more funds than the others, there could be a potential IHT charge.

The consultation also proposes to change the way in which IHT is calculated on the ten-yearly charges and the charges when funds leave the trust. Currently these calculations can be extremely complex and result in a maximum tax charge of 6%. While the consultation document has suggested “simplifying” the calculation, perhaps unsurprisingly this may lead to a higher amount of IHT payable in some circumstances.

Cleaver Fulton Rankin can help clients evaluate their options in relation to pilot trusts already established, as well as other tax planning options. For further information, please contact a member of our Private Client team.