The Impact of the Finance Bill on Multiple Trust Planning
The new Finance Bill has made no changes to the rules in multiple trust planning where multiple trusts have been established on separate days which contain low value/ exempt transfers.
However, the Bill contains a significant change where multiple trusts have been established on separate days but which then receive additional funds on the same day. From 10th December 2014, where funds have been added by a Settlor on the same day into more than one existing trust, the value of these “same day addition” trusts will be aggregated together with the value of each of the separate trusts in order to derive the tax rate payable when capital leaves the trust and at each tenth anniversary. Before the bill, no such aggregation rule applied.
For example, consider the situation where someone sets up 4 discretionary trusts prior to their death and places £10 in each trust. In addition they have a Will which stipulates that, on death, their £800,000 Estate is to be distributed equally across the 4 discretionary trusts. Each trust on death therefore holds £200,010.
Prior to the Finance Bill each trust would have had a full nil rate band, currently worth £325,000. The calculations to determine how much tax is payable at the 10th anniversary and how much tax is payable when capital leaves the trust would ignore the value contained in the other trusts. This treatment differed from the treatment imposed were that person to have not pursued the above Estate Planning strategy and instead to simply have arranged things so that his £800,000 Estate was paid into 4 separate trusts created by his or her will (i.e. no £10 trusts existed prior to the will). In this situation the 4 Will trusts would have been classified as “related settlements” which had all been created on the same day, that is, the date of the person’s death. The value of each trust would therefore have been aggregated with each trust’s own value to establish the rate of tax payable at each tenth anniversary and when capital leaves the trust.
Now, following the new rules contained in the Finance Bill, the setting up of 4 trusts on consecutive days during lifetime and then distributing the contents of a person’s estate across these trusts on the date of death will be given a similar treatment for the purpose of calculating the rate of IHT when funds exit the trust and on each tenth anniversary to the treatment given if a person had created 4 related settlements in his or her Will. That is to say the value of the other trusts will be taken into account because, although the 4 trusts would still have been created on separate days, nevertheless the new money would have all been added on the date of death, that is to say, on the same day.
Trusts which have received same day additions before 10th December 2014 will not be affected by the new rules.
The Finance Bill changes will apply to trust IHT charges from 6th April 2015 where additional property is added to multiple trusts at the same time from 10th December 2014 onwards. Trusts will be protected from these rules however where Wills have been executed before 10th December 2014 with death occurring before 6th April 2016.
Estate Planning Implications
Anyone who set up multiple pilot trusts with the intention of using their Will to add funds on their death should review the Estate Planning to see whether their original objectives are still being addressed by the planning, given the legislative changes and the possible IHT charges which these trusts may now face.
The use of multiple trust planning for lifetime gifting, such as gift trusts, discounted gift trusts and loan trusts, can continue to be used without any real impact. Setting up a number of trusts on consecutive days will still see each trust having its own nil rate band, but in the case of gift trusts and discounted gift trusts, the available nil rate band will be reduced by any earlier chargeable transfers.
Mainstream financial planning which involves placing life assurance policies into trust should remain largely unaffected as both the premiums paid and the death benefits will simply be seen as changes in the underlying value of the trust assets rather than additions to the trust.
Where pension death benefits are paid into a Bypass Trust from a trust based scheme, these will be treated as if they were still in the original trust and will not be considered to be an addition to the Bypass Trust. This means that where pension consolidation has occurred, multiple nil rate bands may be available.
However the situation is different for contract based pensions and here the death benefits paid into a Bypass Trust will be considered to be an addition to the trust and the “same day” additions rules will apply.
Despite the changes contained in the Finance Bill, there are still considerable Tax and Estate Planning advantages to be gained through the use of multiple trust planning and it is recommended that an experienced financial planner is sought in this highly complex area.