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HMRC to allow IHT allowance flexibility in trusts

People putting money into multiple trusts will have to decide how they split their £325,000 inheritance tax allowance between them under new rules proposed by HM Revenue and Customs.

Under current rules, an individual can establish a number of trusts and as long as they are set up on different days each has its own £325,000 nil rate band.

HMRC first consulted on changing the rules relating to “pilot” trusts last August, so that the £325,000 nil-rate inheritance tax allowance is split between the number of trusts, rather than each trust having its own £325,000 allowance.

An updated consultation on the proposed rules, published last week, says respondents to the August consultation found the arbitrary split between trusts “unacceptable”. Instead those using multiple trusts will be able to divide the nil rate band between them as they choose. Married couples will be able to allocate their £650,000 allowance.

Technical Connection joint managing director Tony Wickenden says: “It is a big change, because after all what is the point of having part of your nil rate band allocated arbitrarily to a trust with not very much in it?  It was put to HMRC that a new nil rate band becomes available very seven years, just as you get when you give gifts. But HMRC has said no. It is one for life.”

The new rules are set to come into force from April 2015, although once in place they will be applied from June 6 2014.  This is to avoid people taking advantage of the current rules to set up multiple trusts with their own nil rate bands before the new rules come in.

Trusts established before June 6 will continue to operate under the current rules.

IHT is charged at a marginal rate of 40 per cent above the nil-rate threshold. Amounts above the threshold that are put into trusts are subject to a 20 per cent “entry charge”, plus a 6 per cent charge every 10 years. Exit charges also apply when the assets are taken out of the trust.

The HMRC consultation on the latest reforms closes on 29 August. 

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