Setting up a bypass trust

However Tracyann Kneen, tax and trusts technical manager at James Hay Partnership, says the member may have a bespoke trust deed drafted by a solicitor, bearing in mind that it will need to be aligned with the pension provider’s scheme rules.

Ms Kneen says advisers should also remember that while a trust must be set up during the member’s lifetime it does not have to be set up when the pension arrangement starts.

Template trusts, although useful, should always be used with caution, agrees Claire Trott, head of technical support at Talbot & Muir. She says template trusts are generally specific to the pension scheme and not always suitable for other purposes.

Ms Trott says it is advisable to take legal advice regarding trusts, citing a recent government review of the use of nil rate bands which may yet come to present complications in their use.

At the Autumn Statement in December, the government U-turned on plans to apply a single nil-rate band for trusts to prevent gaming of the system to avoid inheritance tax.

At the Budget new rules were proposed to prevent multiple trusts being set up on different days, each with its own nil rate band below the £325,000 inheritance tax limit. The government stated it will still target this activity, but will look for alternative ways of doing so.

The full text of the Autumn Statement read: “The government will introduce new rules to target avoidance through the use of multiple trusts. It will also simplify the calculation of trust rules.”

Paul Evans, pension technical manager of Suffolk Life, states: “The government have indicated that they will introduce new rules to target avoidance through the use of multiple trusts, so close attention needs to be paid to avoid uncertainty over current or future arrangements.”

As bypass trusts generally form part of wider inheritance planning, Mr Evans agrees it is recommended that clients take legal advice to ensure that any arrangement suits their particular circumstances.

A bypass trust is established with a nominal initial trust fund value (usually by making an initial gift of £10).

Where this falls within a client’s £3,000 annual exemption and the client’s cumulative lifetime gifts over previous seven years do not exceed the IHT nil rate band, Mr Evans says there will no immediate charge to inheritance tax.

Pension providers may offer draft documentation to assist with arranging the trust but Mr Evans says it is important that the client understands that responsibility for the trust being set up correctly lies with them, should they choose to not take legal advice.

As the trust is set up outside of the pension, Mr Evans says it may be possible for the trust to accept benefits from more than one scheme.

However, he says it should be noted that once death lump sums are paid into the trust, any value in excess of the nil rate band will incur exit and periodic charges.