For the past 2 years, the Government and HM Revenue and Customs have been reviewing and proposing changes to the Inheritance Tax treatment of Trusts. The latest proposals are not intended to become law until 6 April 2015. However, the new rules proposed would apply to all Trusts created on or after 7 June 2014 and any additions to existing Trusts made after that date.
Certain types of Trust are subject to Inheritance Tax every 10 years and whenever capital is distributed from the Trust. The calculation of Inheritance Tax is extremely complex and takes account of various factors, one of which is the available “nil-rate band”. Broadly speaking, there should be no Inheritance Tax due unless the value of the Trust Fund exceeds the available nil-rate band.
Most Trusts have their own nil-rate band. This allows an individual to create multiple trusts over his/her lifetime and in his/her Will, each with its own nil-rate band. The new proposals would change that practice and mean that there is only a single nil-rate band available to be shared among all Trusts established by an individual after 7 June 2014 in lifetime or in a Will. For these purposes, any additions to an existing Trust after 7 June 2014 are treated as creating a new Trust.
The proposed changes will have a big impact on life insurance trusts. When putting life insurance in place it is common to gift the policy benefits to a Trust. Indeed, the insurance company often encourages this by providing a form to enable a gift to Trust. Under the existing rules life insurance trusts rarely have to consider Inheritance Tax because such Trusts hold limited assets until a policy matures and the proceeds are paid out. However, the proposed new rules mean that Inheritance Tax will be a key consideration for life insurance trusts and the existence of such trusts may affect the inheritance tax treatment of other trusts established by the same person.
In the 2012 Budget, the Government first introduced the idea of changes to the Inheritance Tax treatment of Trusts by explaining the need to simplify the existing regime. The latest proposed changes, if enacted, will simplify some aspects of the current rules but add significant new complexities. While the new rules are not yet law, we would reiterate that they are designed to apply to gifts to relevant Trusts from 7 June. It is therefore important that the proposals are taken into account in any tax planning undertaken now.