The Finance Bill removes speculation on whether a ‘settlement nil rate band’ would go ahead; it is now confirmed that for mainstream estate planning Trusts will still remain a prudent planning tool.
Aggressive planning through use of multiple ‘pilot trusts’ will be limited by new legislation.
In June 2014, the third set of proposals to address perceived complexities with the inheritance tax position of multiple trusts; it was patently obvious that the key side-effect of the proposals was to remove the effectiveness of the planning summarised above and detailed below.
Planning before 10th December 2014
Before the Finance Bill, and the proposed changes in June 2014, an individual could enjoy a full nil rate band, for the purposes of inheritance tax (currently £325,000) on each trust. Assets over this limit were potentially subject to additional inheritance tax charges every ten years, or on exit from the trust.
By establishing, for example, five trusts with £5 of initial property an individual could gift, £1m in their lifetime, or especially on death, with nil or at least significantly reduced future periodic charges, as five nil rate bands would apply.
Planning after 10th December 2014
Under the new rules, the date money is added to the settlement becomes relevant, not the date of establishment. In other words, if an individual adds to their trusts on death, all of the £1m would be treated as being paid on the same date, the trusts would be related settlements, and only one nil rate band would apply.
Effect on estate planning
For most, planning would be unaffected. We still see significant benefits in pilot trusts for pension lump sum death benefits, where in many cases the original pension trust (as most personal arrangements are constituted in this way) is the relevant settlement for the purposes of periodic and exit dates and charges. Where there have been multiple funds, and consolidations several nil rates bands may apply – the importance of good advice, and good record keeping.
Lifetime gifting should largely be unaffected as trusts set-up on separate days would ordinarily each have discreet nil rate bands.
Of course, care needs to be taken and due regard given to historic planning; the range of circumstances affecting each individual may change or invalidate some of the above, and extreme caution will still need to be taken in the order of gifts, and the order in which trusts are constituted. For these reasons we will typically work with a clients’ existing legal and tax advisers to construct a plan that achieves their estate planning objectives, whilst avoiding any prejudice to their own Financial Planning goals.