Take action on trusts before changes to IHT

The inheritance tax (IHT) treatment of trusts is changing; part to be backdated to 7 June 2014, following the third consultation document published on 6 June. What should solicitors do?

The tax legislation process, changes announced subject to legislation being passed in the July Finance Act, is complicated by a year’s lead-in time and the general election set for
7 May 2015. A short finance bill will enact essential tax allowances before the election meaning new trust legislation will probably pass to the next government.

These charges only apply to:

• IHT on ten-yearly (periodic) charges and exit charges, not any IHT on trust creation or death;
• Relevant property trusts, i.e. most trusts created from 22 March 2006 unless an immediate post-death

interest (IPDI), bare trust or disabled persons trust.

Many earlier trusts were qualifying IIP trusts, a beneficiary having an interest
in possession and the trust taxable with the personal
estate on death.
Watch the anti-forestalling provisions in paragraph 2.38 of the consultation document, not only any new settlements after 6 June 2014, but also two changes to existing trusts:

• Any additions to trusts after 6 June are taxed under the new rules. Don’t add to any trusts without fully considering the implications.
• “Changes made after 6 June… (which) result in relevant property coming into being.” What ‘changes’ are caught? Old-style IIP trusts changed by powers of appointment to any other trust, but possibly not changes on the life tenant’s death. Take care not to give up old protected forms of trust unless fully accepting the IHT consequences.

Reviewing trusts:

• A huge impact awaits pilot trusts set up to receive funds on death, whether from an estate, life policy proceeds or pension death benefit. Now worth reviewing original objectives, what is now likely and whether the structure is still right. The trust could be wound up within two years of death with no ongoing IHT. If designed to continue for longer, consider further points below.
• Review substantive trusts you run: their purpose, beneficiaries and trustee powers, the settlor’s wishes and any likely additions on death; the assets and value and the potential future IHT, so you are ready to advise further in December, once draft legislation is released.

The settlement nil rate
band (SNRB):

A statutory obligation on settlors would require an irrevocable election to allocate their SNRB,
in percentages, between any settlements they have made.

• Once a settlor allocates a percentage of their SNRB to a trust, that percentage can’t ever be used for another trust, unless the trust is wound up in the settlor’s lifetime (or converted to a trust for charity or a disabled person).
• Don’t rush into making the allocation, as it can’t be changed, and any will trust needs special consideration. It is not clear whether settlors can allocate in their lifetime a percentage of SNRB to a trust to be set up by their will.
• It may be only the settlor’s PRs who can allocate to a will trust so consider leaving a percentage unallocated and making a letter of wishes directing the PRs how to allocate that percentage.
• Allocation is needed before any exit or periodic charge arises, or that trust has no SNRB to set against its charge.
• The choices are not easy and detailed expert advice will be needed, especially if pilot trusts have significant funds to follow, or a will trust is being used.
• Advisers should carefully review any trust’s purpose, potential long-term IHT and how best to mitigate, looking at the settlor’s total lifetime and death provision. SJ

  John D Bunker is the head of private client knowledge management at Thomas Eggar

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