Possible new raid on trusts by HMRC affecting your inheritance tax liability
It’s become evident over recent months that rumours are rife over what announcement the Chancellor is likely to make in relation to taxation of trusts. However, one, which is more likely to be announced, is the change to the way each trust is considered to have its own nil rate band.
The current situation – very broadly speaking – is that where a settlor/client creates more than one trust, and in particular on different days, then each settlement is considered to have its own nil rate band. As a rough example, if "A" created a settlement seven years ago and transferred assets to the value of the nil rate band in place back then, and today creates another one and again places assets into the new trust up to the nil rate band, then in effect he has gifted 2 x nil rate bands’ worth of assets away free of inheritance tax on the death estate, provided of course that "A" survives the seven years after the second gift into the second trust.
The rumoured proposal is to allow a settlor only one nil rate band across ALL of their (lifetime?) settlements. The effect of this is considered at the moment to be that the second trust created would bear a chargeable lifetime transfer of 20% - simply because the settlor’s nil rate band has already been used up.
Consider further where, say, three "pilot trusts", had been created a few years ago on different days, with the intention that on the death of the client, their Will left their estate into three trusts, such that each had its own nil rate band. The benefit of this has always been that each trust carried its own nil rate band and in effect created tax-free trust planning at 3 x the nil rate band.
According to the rumoured proposal, there would be one nil rate band applied across all three trusts. It has to be stressed that this is informed ‘rumour’ and nothing has been announced as yet, but the subject has been discussed in the media as well as amongst professionals. However, it’s also important to bear in mind that nothing has been announced as to whether:
- It will actually be implemented
- Whether it will be with immediate effect or implemented in a forthcoming Finance Act
- Whether it applies retroactively to existing trusts or only to new trusts
- Whether it applies to the creation of the trusts themselves or when assets are transferred into those trusts
- And finally whether the tax regime is going to change to accommodate any changes, and if so how.
So, it’s fair to say there is nothing concrete but as the saying goes, there’s no smoke without fire and it is likely that there is some truth in the speculation.
If you have any matters regarding your estate and live in Bexhill, Hastings, Battle, Rye or anywhere in Sussex and Kent, as a Will writer & Estate planning I'll be happy to offer you a FREE CONSULTATION NO OBLIGATION, in your own home at a time convenient to you.
This message was added on Tuesday 4th February 2014
