three generations

A bit different to my normal boring pension posts this one – it has been prepared by my colleague, Nick Davies, mainly for private client lawyers, but I thought you might be interested.

If your Private Client colleagues (if applicable) would like a copy or would like to discuss the Trust Review service that Nick and his team provides then please let us know. If you have any technical queries then please come back to Nick rather than me on this occasion! .

The latest round of consultation on simplifying the IHT charges for trusts have been released. The new rules only apply to new trusts created after 6th June 2014, the highlights of which are

  • The introduction of a Settlement Nil Rate Band (SNRB)
  • The Settlor will decided how this should be allocated
  • A flat rate of 6% will be used for the 10 year anniversary/periodic charge on excess above the SNRB.

See below a link to the consultation paper and a summary.

A new settlement nil rate band

A settlor will have their own ‘settlement nil rate band’ which is separate and unconnected to their personal IHT nil rate band. They’ll be able to allocate this nil rate band between trusts they create, in whatever ratio they choose. Any excess value over a trust’s share of the nil rate band at each tenth anniversary will be subject to a flat rate 6% tax charge.

Moving to a flat 6% charge should make it easier for both settlor and trustees to understand the tax charges they may be faced with. At the same time, gone will be the need to look back at what other transfers into trust had been made to calculate the effective rate of tax to apply on exits and the 10 yearly periodic charge. And making the tax charges easier to understand could remove a potential barrier for those who were put off using trusts because of their tax complexity.

What does it all mean?

It’s the settlor who’s responsible for advising the trustees of the percentage of nil rate band available to that trust. And this election can be changed or withdrawn at any point up to the first charge.

It’s worth remembering that the proposals don’t affect the tax charge on entry. There will still be a 20% tax charge if the cumulative amount exceeds the settlor’s personal nil rate band. The personal nil rate band will still replenish itself every 7 years, allowing further gifts to be made without suffering an entry charge. So any planning to avoid IHT entry charges on gifts to trusts will be unaffected. The changes will only affect the ongoing IHT charges for the trustees.

This means that settlors will need to decide how much of their SNRB to allocate to each one they create. Ultimately, this will be the amount used in the calculation of the 10 yearly periodic charge. However, once allocated to a trust, it can’t be reduced or taken away.

It may even be prudent in some cases to delay the allocation of SNRB until the trustees have a clearer idea of the net trust value at the 10 year anniversary and the settlor’s future gifting plans have been considered.

HMRC addresses concerns

Those who’ve undertaken Rysaffe type planning in the past may sleep a little easier now that it’s been confirmed that any changes won’t be retrospective. This followed pressure from those who had based their planning on the existing rules and who could have faced unexpected tax charges under the original proposals.

The initial purpose of the consultation was to simplify the calculation of charges for trustees, specifically the ‘periodic’ and ‘exit’ charges. However, it became clear that HMRC was also using the opportunity to put a stop to the practice of setting up a series of trusts, each with its own nil rate band, to reduce any charge. HMRC had previously failed in their challenge to such schemes in the courts in the case of Rysaffe Trustee Company.

Concerns have also been addressed that would have affected more mainstream planning with trusts. The original proposals would have forced an equal sharing of the nil rate bands between all trusts created. This may have resulted in the nil rate band being automatically apportioned to trusts which may never use it. For example, those that never acquire any appreciable value, such as life policy trusts and trusts set up to accept death benefits from pension schemes. Or trusts whose value may have been well below the nil rate band. Correspondingly, larger value trusts could have faced a larger IHT charge as a result.


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