TrustsWillsCould Changes to the Taxation of Pilot Trusts Affect You?

4 August 2015by WillPack1

Following the Chancellor’s Autumn Statement at the end of 2014, legislation is now going through parliament which aims to limit the use of ‘pilot’ trusts.
Pilot trusts are an accepted form of Inheritance Tax (IHT) planning, commonly used to reduce the impact of the special IHT regime which applies to trusts, known as the ‘relevant property regime’.

If a trust falls within the relevant property regime, the assets do not form part of the estates of any of the beneficiaries of the trust. Instead, there are potential charges to IHT when capital leaves the trust by way of outright distribution (an ‘exit’ charge) and on each tenth anniversary of the creation of the trust (a ‘periodic charge’). The calculation of these charges is complex but, broadly, they only apply to the extent that the trust fund exceeds the available nil rate band (currently a maximum of £325,000) at the time of the charge. The current maximum rate for periodic and exit charges is 6% over any ten year period.

What are pilot trusts?

A pilot trust describes a flexible trust set up by an individual with a nominal amount of, say, £10 with a view to adding more assets to the trust in due course.
Provided a pilot trust is created on a different day to any other trust established by the same individual, then that trust is treated as having its own IHT nil rate band of £325,000 when calculating periodic and exit charges.
Provided the amount in the trust remains below this threshold, there should be no IHT to pay on ten year anniversaries, or on distributions from the trust.

How are pilot trusts used?

Typically, an individual would create a number of pilot trusts, each on different days. On death, his assets would pass to the pilot trusts under the terms of his Will. Because each of the pilot trusts has its own nil rate band, periodic and exit charges should be significantly reduced, or even avoided altogether.
Pilot trusts are also useful for estate planning which is not tax motivated. For example, an individual who wants to ensure each of his four children can manage their inheritance independently from the others may leave assets to four trusts on his death (ie one for each child).

What will change under the proposed new rules?

Broadly, assuming that the legislation is introduced substantially in its current form, the new rules on same day additions (SDAs) to pilot trusts will mean the value in each of the trusts is aggregated when periodic and exit charges are calculated, and only one nil rate band will be available across all those trusts.
Accordingly, if an individual’s Will leaves assets to, say, four trusts on his death, the IHT treatment of the trusts on ten year anniversaries and on distributions will be the same as if his Will had left the assets to a single trust. So, the use of multiple pilot trusts means the settlor is no worse off, but the IHT benefit of having more than one trust is curtailed.

My Will uses pilot trusts. Do I need to change my Will?

There is no need to change your Will.

Indeed, for Wills and pilot trusts created before 10 December 2014, where the person who created such a Will with pilot trusts dies before 6 April 2017, the new SDA rules do not bite and the IHT benefits of multiple pilot trusts are preserved.

Any changes to those Wills and trusts before 6 April 2017 could jeopardise this favourable IHT treatment and so it would not normally be advisable to make any changes before then, at least not without taking appropriate advice.

For deaths after 5 April 2017, the IHT position is still likely to be favourable because the assets will not form part of any of the heirs’ estates for IHT purposes and there may be perfectly good reasons for having multiple trusts, such as leaving each child with a trust of their own.

Trusts – safeguarding assets for future generations

Trusts remain flexible and valuable tools to help families protect their wealth and safeguard it for future generations. Crucially, the proposed new rules will not prevent an individual from creating a trust up to his available nil rate band every seven years. Indeed, the use of multiple trusts is still beneficial in certain circumstances, for example, where an individual is making gifts out of his surplus income.

by WillPack

Please note that we are only insured to provide advice to our partners. If you require any advice we would recommend contacting the Society of Will Writers on [email protected] or 01522 687888 who will be able to put you in contact with a will writer local to you.

One comment

  • Denice Gierach

    1 February 2016 at 8:16 pm

    Having to know that the use of multiple pilot trusts means the settlor is no worse off really helps simplify things for the person interested in wills and trusts.

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