HMRC creates dual IHT regime for trusts

HMRC has confirmed new proposals for a single nil rate inheritance tax band for trusts will hit existing trust arrangements, where no further assets are added or variations made to that trust, a move that Skandia has labelled “pragmatic”.

A consultation paper published by HMRC, called Inheritance Tax: a fairer way of calculating trust charges, reveals the government’s concerns with setting up multiple trusts on different days, each with its own nil rate band below the £325,000 inheritance tax limit.

HMRC were concerned this tax planning arrangement was being abused, and set about consulting with the industry on how it could close down this practice by introducing a single nil rate band for all trusts created by the same individual.

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It was feared the new proposals would be retrospective, and HMRC would introduce a single nil rate band across all existing trusts.

This would have meant some existing trusts facing a tax charge for the first time at the 10-year periodic charge point. HMRC has now proposed to leave existing trusts alone.

Trusts set up prior to 6 June 2014 will remain under the current arrangements, creating a dual inheritance tax regime for trusts.

The proposed changes will take effect from 6 April 2015, and will only apply to trusts set up on or after 6 June 2014.

Trusts created before 6 June 2014 are not completely out of reach, Skandia said. If any trust has additional assets added to it or where it becomes a relevant property trust on or after 6 June 2014, the change will bring that part of the settlement into the new regime.

According to Skandia, the changes will create demand for financial advice to ensure thousands of existing trust arrangements are not caught by the new rules and trusts will remain a valuable tool for advisers to use when carrying out estate planning for their clients.

Rachael Griffin, head of technical marketing at Skandia, said: “HMRC has been pragmatic in its proposals. With the right advice it is possible for existing trusts to remain unaffected preventing thousands of trusts becoming liable to tax, avoiding a headache for both clients and advisers.

“Trusts will continue to offer advantages in estate planning compared to relying solely on a will to pass assets on. Advisers can add value by ensuring the tax efficient benefits are maintained and the new rules are applied correctly.”