Tax-ducking trusts

Advisers who are not familiar with the intricacies of trust planning will be forgiven for wondering what all the fuss is about.

This article sets out to explain why this is important, why it is good for customers, and how it can open up more opportunities in trust planning.

Setting up discretionary trusts on different days, each below the £325,000 nil rate band IHT limit, has proven a popular wealth planning strategy for many advisers and clients over the years.

Multiple trusts can provide additional flexibility allowing trustees to employ different investment strategies for individual beneficiaries’ needs.

By establishing a series of smaller trusts, rather than just one trust, it is possible to reduce the tax charge at the initial 10-year periodic charge point, and the exit charge.

If the trust is over £325,000 at the periodic charge point, a charge may apply, but that charge is reduced in line with the nil rate band.

By creating multiple trusts – say, three trusts rather than one – future taxes can potentially be negated or significantly reduced.

Advisers who are not familiar with the intricacies of trust planning will be forgiven for wondering what all the fuss is about

At the 10-yearly periodic charge, the potential to use a nil rate band allowance for each trust will mean that where the value is below the NRB threshold, no tax will be due at that point, plus all future exits will be charged at 0 per cent.

If the values are above the NRB the tax will still be less than if one trust had been used, resulting in a smaller percentage charge, applicable for both the 10-yearly charge and future exits.

This strategy is dependent on the size of the investment, chargeable transfers made in the previous seven years, and assumptions such as growth rates and NRB values being consistent.

What caused all the confusion and uncertainty?

Back in 2013 the UK government began its consultation over the use of trusts and whether the taxation of discretionary trusts (or relevant property trusts) should be simplified.

At this point HMRC proposed introducing a single NRB across all discretionary trusts, rather than one NRB for each trust created. This created waves in the industry as not only would it change current trust planning practices but it would also potentially affect existing clients with multiple trusts.

In the chancellor’s 2014 Autumn Statement the government U-turned on this decision, implying it still believed in the principles behind the proposed legislation but would reconsider proposals to find a better way of implementing the change.