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Inheritance Tax and trusts

There was only the briefest mention of Inheritance Tax and trusts in the Autumn Statement

Following consultation launched after Budget 2014, the government will not introduce a single settlement nil-rate band.  The government will introduce new rules to target avoidance through the use of multiple trusts.  It will also simplify the calculation of trust rules.

The consultation referred to had proposed that new rules would only apply to the calculation of Inheritance Tax charges from 6 April 2015.  However because the Revenue were concerned that the publication of the new rules might encourage people to get round the provisions by making settlements into trust prior to 6 April 2015, they had proposed that the new rules should apply to settlements or additions to settlements made after 6 June 2014

An example

At present an individual can make a gift equivalent to the nil-rate band (currently £325,000) into trust.  If they survive seven years following the date of the gift, then the value gifted into trust would be fully outside of their estate for Inheritance Tax purposes.  The individual could then go on to make a further gift into trust and once again if they survived seven years the value gifted into trust would again be fully outside of their estate for Inheritance Tax purposes and the process could be repeated. Cumulatively over a number of years of adopting this approach, the Inheritance Tax saving can be attractive.   Each trust would have its own nil-rate band for Inheritance Tax so the trusts themselves would face only minimal or no Inheritance Tax on ten year anniversaries or exits.  There are many variations in existence on such arrangements.     

By introducing the concept of the settlement nil-rate band the government were clearly aiming to clamp down on such arrangements.  However the proposals had caused considerable uncertainty, firstly as to how exactly the new rules would work and secondly as to whether additions should be made to existing trusts in the period between 6 June 2014 and 5 April 2015.  The announcement in the Autumn Statement is welcome and for the time being nothing has been announced to discourage people making settlements into trusts as outlined by the above example.

 

 

Date: 4th December, 2014
Author: Daniel Bisby

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