Pilot trusts post the Finance Bill 2015

18 December 2014

One of the bigger surprises in this year’s Autumn Statement was the news that the much consulted upon new ‘Settlement Nil Rate Band’ has been dropped.

One of the reasons for proposing a Settlement Nil Rate Band was to make the use of multiple trusts less attractive for Inheritance Tax (IHT) mitigation purposes. Each trust would no longer have its own IHT nil rate band to set off against the periodic charges to IHT, such as the ten year anniversary charge and any exit charges, that it may face during its existence.

Now, with the publication of draft clauses for the Finance Bill 2015 last week, we learn that, in certain situations, there remains a future for planning involving multiple trusts after all.This planning often involves the use of pilot trusts. These are trusts set up, often with only a nominal amount initially, such as £10, and funded with more substantial sums later.

The draft Finance Bill clauses provide that only where funds are added by the same person to two or more trusts on the same day, after they have commenced, will those added funds be treated as related property, which is taken into account when calculating the IHT periodic charges in relation to any of the settlements in which those funds are held. Additions to trusts in order to pay certain life insurance premia are not within this new regime.

This means that planning that involves the use of a number of pilot trusts, into which a will pours over assets on death, will no longer achieve any IHT savings on periodic charges (though pre-10 December 2014 arrangements will operate under the old rules, but only if a death occurs before 6 April 2016). That is not to say that such planning is now defunct though. There may be good, non tax reasons for keeping this type of structure in place. However, you may wish to make a mental note to review such arrangements in the new year.

In contrast, planning that involves setting up, say, five £10 pilot trusts in year 1 and then funding them in years 1 – 5 with gifts of surplus income received in that year which qualify for the ‘normal expenditure out of income’ IHT exemption should still work, as each year’s surplus income is not being added on the same day and therefore is not related to any other year’s surplus income when it comes to calculating IHT periodic charges on each of the five trusts.

There has been no shortage of wealth planning developments in 2014 and no doubt the pace will continue unabated in 2015! However, in the meantime may I wish all my readers a very happy and peaceful Christmas, wherever you are. My first post for 2015 will be on Thursday 22 January.

Helena Luckhurst Author
Helena Luckhurst
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