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Concern IHT ‘pilot’ trust tax change could be retrospective

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Concerns have been raised that changes to the inheritance tax treatment of so-called ‘pilot’ trusts could be applied retrospectively.

In May, HMRC launched a consultation proposing a change to the rules on multiple trusts with regards to the £325,000 nil-rate inheritance tax allowance and how it applies to the 10 yearly 6 per cent charge.

At present each split trust set up by the individual is granted the £325,000 nil-rate allowance before the 10 yearly 6 per cent charge is levied. However, HMRC wants this allowance to be split across all the trusts set up by the individual when it comes to calculating this charge.

Skandia head of wealth planning Colin Jelley says that although HMRC has not confirmed whether this change will apply to trusts that are already in existence, this could well be the case.

He says: “The Government does not like the idea of retrospective tax changes, but the idea of this consultation is to simplify the tax treatment of these things and if you only do it for the future that leaves a lot of people’s arrangements unsimplified.”

‘Pilot’ trusts are set up ahead of death and kept open usually with a very small deposit. Under current rules, on death and after payment of the initial rate of 40 per cent on anything over the £325,000 threshold, inheritances can be split up and moved into a number of these trusts. As long as they are established on different days each trust can treated as a completely separate pot in relation to the 10-yearly charge of 6 per cent, each with their own £325,000 allowance.

In April, HMRC published examples on the General Anti-Abuse Rule. It said if an individual sets up several ‘pilot’ trusts on the same day, even if they all amount to below the £325,000 inheritance tax threshold, they would have been considered related and faced the 6 per cent charge every decade. But, if the trusts were set up on different days they would not, as long as the individual total in each trust was less that £325,000.

It added that the point had been tested in court case between HMRC and Guernsey-based Rysaffe Trustees. The Revenue lost the case in which ‘pilot’ trusts had been set up on consecutive days for no other reason than producing a “tax-advantaged position”. HMRC’s April GAAR guidance says because HMRC had not then chosen to change legislation it “must be taken to have accepted the practice”.

Despite this April guidance, the further consultation in May suggests the rules are set to change. One of the things HMRC wants feedback on is whether the allowance should be split equally between trusts or whether it should be based on the value of each one.

Jelley says: “If you split the nil-rate band between two trust of different sizes, one might use all of the allowance while the other one does not reach its £162,500. Splitting the allowance proportionately would address this.”

An HMRC spokesman says: “We are consulting on the proposed changes and no decisions have been made. The consultation proposes a range of options and we welcome contributions from anyone with an interest in the issues”

For more on this issue see Tony Wickenden’s recent column in Money Marketing and Octopus managing director Paul Latham’s blog

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