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Tony Wickenden: Applying IHT to relevant property trusts…the final instalment


For the past few weeks I have been considering how the proposed new rules for applying inheritance tax to relevant property trusts (broadly discretionary and flexible trusts) would apply, first to trusts created on or after 7 June, and then before that date.

I am going to continue with the consideration of the latter category. I covered trusts of protection policies last week and this week I will finish off the series with the other main trust types.

Spousal bypass trusts

Spousal bypass trusts set up prior to 7 June will, like any other trust set up before that date, retain the benefit of their own nil-rate band.  Death benefits payable from a trust-based pension scheme are deemed to be held in a separate trust that commenced when the member joined the pension scheme. Under section 81 IHT Act 1984 this separate trust continues for IHT purposes even if benefits are later paid to another trust such as a spousal bypass trust.

The treatment of the death benefit pension scheme trust will, under the rules as they stand, therefore again depend on when the member joined the scheme and how much is involved. 

Different considerations may apply where the pension scheme is not a trust-based scheme but contract-based (for example a personal pension established under a deed poll or an old retirement annuity policy) or where consolidations or transfers have occurred. 

It is unlikely that an IHT charge will ever arise in relation to the bypass trust itself (assuming it was created with a nominal amount) before receiving any payments from the pension scheme fund on the death of the member.

Loan trusts

Loan trusts created prior to 7 June will each benefit from their own nil-rate band calculated on current principles. Where a series of loan trusts (as opposed to gift and loan trusts) has been created on different days prior to 7 June, no one trust will impact on the settlor’s cumulative total for the purposes of calculating IHT charges on the others, as no initial gift will have been made.

Note that where loan repayments are waived in favour of the trust after 6 June, this will count as an addition to the trust and the amount waived will be taxed under the new regime as a separate fund within an existing trust.

Discounted gift trusts

Discounted gift trusts created prior to 7 June will, like all other trusts created before that date, continue to benefit from their own nil-rate band calculated according to current principles.

Where a series of discounted gift trusts has been created over successive days, earlier ones will impact on later ones for the purpose of assessing how much nil-rate band is available to a particular trust. 

Care should be taken where the settlor is considering deferring or waiving entitlement to one or more fixed payments because if this results in an increase in the value of trust funds over what they would have been had the settlor taken their payments, that additional part of the trust fund could become subject to the new regime.

Pilot trusts for testamentary gifts

Pilot trusts set up before 7 June would each continue to benefit from their own individual nil-rate band (calculated in accordance with the current rules), but when property is added to those trusts on death occurring after 6 June (that is via the deceased’s will), the addition would be subject to the new rules and would have to share the settlor’s settlement nil-rate band (SNRB) or the proportion that remained unallocated.

HM Revenue & Customs refers to the need for simplification in its latest consultation document. But to accommodate the representations made on the last consultation document, it is now proposing to run a dual system of taxation – one for pre-7 June trusts and one for post-6 June trusts. And if existing trusts are tainted, they could be subject to both sets of rules.

Subject to change

The proposals set out in the consultation document are not yet law so are subject to change following consultation. 

While HMRC has included examples in the consultation document itself, it does not cover all eventualities and thus the examples in this and my previous articles provide only an indication of how the new rules might apply to the common scenarios if the proposals are enacted in their current form.

That said, if enacted on the basis discussed, the simplified proposals will offer a number of opportunities to advisers. In particular, trusts will need to be reviewed as they approach 10-year anniversaries to determine whether changes to the allocation of the SNRB need to be made and advisers will also need to consult with personal representatives following a settlor’s death to determine what action needs to be taken, if any.

Careful consideration of all the implications will be necessary before top-ups are made to trust-based policies as well as when trust investments are reviewed and new trusts are created.

Perhaps of greatest importance to advisers is the need to understand the new proposals and what they mean for existing and new trusts. 

It is also important to note the proposed changes do not spell the end for trust-based estate and IHT planning. Evidence is only a very small proportion of overall trust-based planning carried out to date has incorporated a multiple trust strategy.

Tony Wickenden is joint managing director of Technical Connection

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