19th December 2014
2014 Autumn Statement - Changes to Trusts
Relevant Property Trusts are also known as Discretionary Trusts or Family Trusts.
They allow flexibility in who benefits. For these purposes they include “18 to 25” trusts for children. They are subject to a separate inheritance tax regime, which is intended to have the same overall affect as if the trust’s assets had been owned outright and had therefore been taxed roughly every 30 years at 40%, as it passed between generations. It achieves this through a mixture of periodic charges, including on each ten year anniversary, and exit charges when capital leaves the trust. However, there is long established tax planning which has been used to reduce the amount which HMRC feels it should receive.
The tax planning involves the use of multiple trusts. Multiple “Pilot Trusts”, say 20, are created on 20 separate days with a nominal sum of cash. The taxpayer’s Will leaves his Estate to those 20 separate Pilot Trusts, instead of leaving it to just one Relevant Property Trust created in the Will. Although the taxpayer has had to pay the cost of creating those Pilot Trusts, his family then benefit through the generations by having 20 nil-rate bands to reduce the tax payable on the ten yearly charges (instead of just one nil-rate band which would otherwise have been the case).
Countering the use of Pilot Trusts has been the subject of consultation for the past year. It is, however, easier said than done. Each consultation concerning a proposed method brought to light various problems and inequalities. However, it was thought that the proposal of 6 June 2014 was highly likely to proceed. That brought in the idea of a limit of one nil-rate band to be shared amongst all settlements created by a taxpayer after that date. It would have caught all previous Pilot Trusts because “created” would also include additions to trusts e.g. those made on death by a Pilot Trust Will.
For better or for worse, the Autumn Statement announced that the anti-avoidance procedures would not now be as set out in June 2014, although anti-avoidance procedures would still be brought in. Those new proposals were issued on 10 December 2014 and the closing date for commentary on them is 4 February 2015.
10 December 2014 Proposals
There are five main suggestions (of which 3 could be helpful!):
Attack on Pilot Trusts. Additions made on or after 6 April 2015, and made on the same day to more than one settlement, are to be treated as “related”. This would have the effect that one nil-rate band is shared amongst those settlements, removing the benefit of Pilot Trusts. However, other settlements will continue to have their own separate nil-rate band. This will still target the use of Pilot Trusts, but will not (as was previously the case) engender problems for “innocent” trusts, such as those created to hold life insurance and pension benefits. Conditional Exemption (heritage) relief claims. Previously the claim had to be made before the 10 year charge arose, meaning tight time pressure on advisors. In future the claim can be made within two years after the charge arises.
“Non relevant property”. Basically property in which there is a life interest, or certain property with foreign elements. The rate of periodic charges will in future be calculated without taking such property into consideration, which will simplify the calculation.
“Frankland tax trap”. There has been a longstanding “tax trap” where distribution is made from a Will Trust to a surviving spouse/civil partner within three months of the death. After the three months this could be read back into the Will terms, obtaining spouse exemption, but before the three month date, there would be no spouse exemption and no capital gains tax holdover relief. This trap for the unwary (and those not properly advised) is to be removed.
Pre- March 2006 Interest in Possession Trusts, s.80 IHTA. This covers the position where one party in a marriage, or civil partnership, succeeds to a life interest to which the other party was previously entitled during his/her lifetime (in such a way that that successive interest is not a protected “transitional serial interest”). Legislation will clarify that such settled property will be subject to the Relevant Property charges.
The changes will apply to tax charges arising on or after 6 April 2015 in respect of all Relevant Property Trusts (and “18 to 25” trusts) created on or after 10 December 2014. To catch existing Pilot Trusts which have not been funded before the 10th December 2014 ( by the death of the taxpayer), it will also apply to Relevant Property Trusts created before 10 December 2014 if property is added on or after that date to more than one trust on the same day (as would happen under a Pilot Trust Will).
Given that taxpayers (or their advisors) knew from at least 6 June 2014 that Pilot Trusts were to be attacked, it’s uncommonly generous of HMRC to propose that the changes won’t affect those who funded their Pilot Trusts (presumably by dying) between June and December.
Taxpayers know that the use of multiple settlements, Pilot Trusts, is still going to be attacked and that it is likely to be retrospective. However, we have already seen the nearly certain to be legislated June 2014 rules scrapped and there is time for a further change between now and the legislation being enacted. Not to mention the possible effect of a general election!
What to do? A one-off advantage?
Generally it’s wait-and-see. In some cases it is particularly important not to act precipitately: there is a limited exception to the new rules, a form of transitional relief which it is important to preserve. The new rules will not (apparently) apply to additions to Pilot Trusts made where the Pilot Trust Will was executed before 10 December 2014 and the death occurred before 6 April 2016. If therefore you have created a Pilot Trust with a matching Will prior to 10 December 2014, it is important not to replace that Will until after 6 April 2016. This is because someone with such a Will who dies before 6 April 2016 will still benefit from the “tax avoidance” benefit of multiple nil-rate bands. However, if such a person survives to 6 April 2016 then they need to review their Wills: without the benefit of multiple nil-rate bands, those Pilot Trusts may have significant administration cost disadvantages.
For further information please contact either Daniel Curtis (Cambridge) on 01223 461155 or email Daniel by clicking here, Clare Colacicchi (Northampton) on 01604 233233 or email Clare by clicking here or Carolyn Bagley (Milton Keynes) on 01908 247010 or email Carolyn by clicking here.
For more information on our Tax and Trusts services click here.
This article is written as an outline guide only and any action should not be based solely on the information given here. Appropriate professional advice should always be taken in specific instances.