Multiple trusts using nil rate band could face tax charge for the first time

5th December 2013

The Chancellor George Osborne has signaled the end of the use of multiple trusts and multiple nil rate bands for inheritance tax planning.

Some trusts set up under such multiple arrangements could be liable for a tax charges for the first time. A person benefiting from four such trusts could be liable for a tax charge exceeding £50,000.

Setting up trusts on different days, each below the £325,000 IHT limit has proved a popular wealth planning strategy for people over the years. Financial firm Skandia says the new proposals could introduce a single nil rate band, i.e. the amount you can inherit without being liable for an IHT charge, across all such trusts. This proposed change in legislation means these trusts may now face a tax charge at what is known as the 10 year periodic charge point and if these trusts already exceed the IHT limit, their tax liability could be even greater says the firm.

For example if a client has created four trusts, all below the IHT threshold, then under current legislation, depending on when the trust was set up, the trust would not be liable to a 10 year tax charge. Under the proposed legislation, the nil rate band will be split between the four trusts, and a maximum 6% tax charge will be applied on the excess over the nil rate band on each trust.

 

Current legislation

Proposed legislation

Trusts:

Value:

Nil rate band

10 year tax charge

Nil rate band

10 year tax charge*

1

£320,000

£325,000

£0

£81,250

£14,325

2

£320,000

£325,000

£0

£81,250

£14,325

3

£320,000

£325,000

£0

£81,250

£14,325

4

£320,000

£325,000

£0

£81,250

£14,325

Total

£1,280,000

£0

£57,300

 

*Uses a maximum 6% tax charge as proposed in the consultation paper.

 

Using the example above, the proposed change could result in the trustee being liable to a £57,300 tax charge at the 10 year periodic charge point.

Colin Jelley, head of wealth planning at Skandia, says: “This new piece of legislation looks set to have a significant impact on existing trusts. Existing arrangements will need to be reviewed to ensure they are structured in the most tax efficient way possible. Although the proposed change in legislation means a greater tax liability for some trustees, the benefits of trusts for estate planning purposes remains and, set up in the right way, clients can still benefit greatly. With inheritance tax on death set at a substantial rate of 40%, using trusts could still be an attractive option for many families despite the maximum charge of 6% every 10 years.”

If you are in position to own a trust, it will make sense to consult your financial adviser about your arrangements. The changes are only at consultation stage, but it will make sense to plan for any changes.

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