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Welcome news for trusts – at last!

HMRC’s recent report on calculating Inheritance Tax (“IHT”) charges on trusts states:

It is not HMRC’s intention to discourage the use of trusts and HMRC understands the majority of trusts are created for reasons outside of tax planning

Not only is this acknowledgement and statement of intention welcome, but so too is the fact that the three recent Consultations which have addressed the “complexity and fairness issues relating to the IHT rules for trusts” have resulted in measured and targeted legislative changes to simplify the rules and tackle the perceived mischief.

The background, broadly speaking, is that most trusts are now assessed to IHT charges every ten years at a 6% rate on the net value of the assets within the trust to the extent that this value exceeds the IHT nil-rate band (currently £325,000).  This IHT charging regime for trusts exists because generally assets held within a trust do not form part of an individual’s estate and are therefore not assessed to IHT on the death of that individual.

HMRC has had two concerns.  First, it has wanted to simplify the complex rules by which these 6% IHT trust charges are assessed.  Secondly, it has wanted to tighten up the rules, because legitimate ways of mitigating these IHT trust charges have become widely employed.  One such way has involved the settlor (ie the person who establishes the trust) establishing multiple smaller value trusts in such a way that each trust has its own IHT nil-rate band, thereby reducing the likelihood of the value of the assets within each trust exceeding the IHT nil-rate band, and the consequent IHT charges.

Until the Autumn Statement on 3rd December, HMRC looked set to introduce a single ‘settlement nil-rate band’ which would have been divided between all of an individual settlor’s trusts.  This change would not just have blocked the future use of multiple trusts but would also have curtailed the use of trusts more generally.  Furthermore, its retroactive effect would have prompted some individuals to unwind previously established trusts.

It is therefore encouraging to see that HMRC has been persuaded to introduce specific targeted measures.  One of the changes will prevent individuals securing any IHT advantages by establishing multiple trusts on or after 10 December 2014 or by adding assets to pre-existing multiple trusts.  This change will also apply to Wills executed before 10 December 2014 where the testator dies after 5 April 2016.  This deferral is to allow affected individuals to change their Wills if they so wish.  Other changes will simplify the calculation of the IHT trust charges.

Importantly, settlors will continue to be able to transfer assets with a taxable value up to the value of the nil rate band into trust every 7 years.

For further details of these changes or for more general advice on Inheritance Tax or trusts, please speak to your usual Saffron adviser or to Nicholas Hughes.