In July, I posted a Blog regarding the Government’s proposals to change the Inheritance Tax treatment of certain types of trusts. In particular, the Government suggested that there should only be a single nil-rate band available to be shared among all trusts established by the same individual after 7 June 2014. In the 2014 Autumn Statement, the Government announced that that proposal (which had met with heavy opposition) would not be taken forward.
For the fourth time since this process began, the Government went back to the drawing board and has published new suggestions for changes to the law. These new proposals should impact significantly fewer trusts than any previous attempts at reform as they are targeted very specifically at ‘pilot trusts’.
Pilot trusts are a form of tax planning where an individual establishes several trusts on different days and transfers a nominal sum into each trust at its creation. The trusts then effectively lie dormant for a period. At some point in the future (usually following the individual’s death) significant sums are transferred to each of the trusts. In terms of the current rules, this structure should result in a lower total Inheritance Tax bill than would have been the case if a single trust had been used.
It has long been clear that the Government wants to restrict the use of the pilot trusts and some of their previous reform proposals have been intended to have that effect. If enacted, the latest proposals should achieve the Government’s aim. However, the good news is that they should have little impact on other trusts (in contrast to the changes previously suggested).
Broadly speaking, the practical impact of the proposed changes is that the value of all the pilot trusts will be taken into account whenever each trust is subject to an Inheritance Tax charge (every 10 years and whenever capital is distributed from a Trust). This should mean that there would no longer be any tax benefit provided by using pilot trusts.
The Government has also proposed some minor simplifications to the current regime, which should only affect a limited number of other trusts meeting the relevant criteria.
The Government intends to include these changes to the law in the Finance Act 2015 and, if enacted, most would have effect from 6 April 2015. At that stage, there may finally be an end to the uncertainty for individuals, trustees and their advisors who are considering the tax treatment of trusts. However, with the General Election approaching, it is quite possible that the next Government may want to re-open this whole topic. We shall continue to keep you up to date.