This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK
Does using multiple trusts save Inheritance Tax (IHT) still, or has IHT planning with multiple trusts been effectively abolished? When the second Finance Act of 2015 comes into force later on this autumn, we will finally have the answer.
Those with enough spare memory to remember shelved legislation will recall that this time last year, we were enthusiastically discussing the finer details of the proposed Settlement Nil Rate Band, being the creation of the third consultation on changing the IHT taxation of trusts. This measure provided that the IHT nil rate band was to be shared between all trusts that a settlor had created in their lifetime. This was rejected in the Autumn Statement 2014, in favour of a targeted anti-avoidance provision against the use of multiple trusts to mitigate IHT periodic charges.
As a result, we are about to have a new section 62A IHTA 1984, which introduces Same Day Additions (SDAs) into the tax code, affecting for the most part only trusts created, or SDAs made, on or after 10 December 2014. If the same settlor makes additions to two or more settlements on the same day, effectively both of the settlements will be treated like settlements that are related to each other for IHT purposes when it comes to calculating periodic IHT charges in respect of each settlement, such as the ten year anniversary charge. The value of the SDAs to both trusts and the initial value of the relevant property (only) in the other trust will be factored into the IHT periodic charge for each trust. The aim of the legislation is to ensure that the IHT treatment will be the same as if the two settlements were in fact one.
As always, there are exceptions. There will be no SDAs if one of the trusts is for charitable purposes, or the SDAs relate to payments of certain regular life policy premiums. The value of the addition also has to be more than £5,000, broadly speaking.
It is not uncommon for a Will to direct assets to pour over into a series of trusts created in lifetime on different days. Each of those trusts would have had its own IHT nil rate band to put against periodic charges. Not any more, because of the SDA rules. However, the draft Finance Act included new wording that provides that the SDA rules will not apply if one of the trusts being added to is not, and never has been, a trust that is within the IHT relevant property regime.
Therefore, if a parent has one child that is disabled and another that is able-bodied, the SDA regime will not apply if the parent’s Will pours over assets into a disabled person’s interest trust for the disabled child and a discretionary (relevant property regime) trust for the able-bodied child. Or an IPDI for one child with modest other personally held assets, the combination of the two being unlikely to exceed the available IHT nil rate band for that child, and a discretionary trust for another child who needs to protect his inheritance, for IHT or other purposes. Or if the Will pours over assets into both a pre-existing charitable trust and a trust for an adult child.
Care must be taken with pre 10 December 2014 trusts that received pre 10 December 2014 SDAs. These have protected status under the new legislation but any additions to them after that date that increase their value, whether those additions happen on the same day or not, will cause those trusts to lose their protected status going forward.
The other important point to take on board is that it’s ‘business as usual’ for using multiple trusts where it is possible to put in assets, without triggering an IHT entry charge, on different days. So for example, using multiple trusts dated on different days to receive annual gifts of surplus income is still good IHT planning as, with care, each trust need never pay IHT periodic charges. The same applies for assigning life policies into separate trusts on different days, or for products such as discounted gift plans.