Updated 03 September 2020
Clive Barwell of Towergate financial shares the latest on tax and trusts.
The Finance Act 2006 introduced some radical and far-reaching changes to the way Inheritance Tax (IHT) applied to Trusts and now HMRC has had another go at these valuable financial planning tools.
A landmark case in 2003 established the “Rysaffe Principle”, which was that a series of Trusts, regardless of how many, set-up by the same person would each have their own Nil Rate Band. What this meant was that one big Trust with £3,250,000 in it would have a king-sized IHT liability on the 10th anniversary, whereas 10 Trusts each valued at £325,000 (Nil Rate Band in 2014/15 and frozen until 2019) would have no IHT to pay at that anniversary.
With any new Trusts set-up on or after 06 June 2014, each “Settlor” – the person who sets-up the Trust – will only have one Nil Rate Band available to allocate to those Trusts. This puts an end to the Rysaffe Principle.
Whilst HMRC says the new regulations are not retrospective, they do apply to any Trusts set-up before 06 June 2014 should that Trust be changed in any way or have additional assets added. A common practice amongst Advisers was to set-up a series of “Pilot” Trusts – generally a Trust with a minimal asset such a £10 note – to which it was intended to add further funds at a later date. These pilot Trusts will be brought into the new regime the minute an additional asset is added in the future, defeating the whole objective of the planning in the first place.
Anyone with a series of existing Trusts, including pilot Trust, should seek advice on how the new rules will affect them.
About the author
Clive Barwell is a financial planner at Towergate financial and an accredited member of the society of later life advisers.