As part of a wider crackdown on tax avoidance, the Government has announced plans to limit the inheritance tax advantages of creating multiple trusts.
Until recently, taxpayers could achieve substantial tax advantages by setting up several trusts on different days with small sums (e.g. £10) to which they would later add substantial cash/assets. Each trust would then have its own inheritance tax (‘IHT’) ‘nil rate band’ and the cash/assets could be held in trust for successive generations at relatively low IHT cost.
In 2003, HMRC took one taxpayer to court who had carried out such an arrangement, arguing that all the trusts were really part of the same arrangement so the trusts should not benefit from multiple IHT nil rate bands. HMRC lost that case (known as Rysaffe Trustees v IRC), and taxpayers have been relying on that decision as a legitimate way of minimising IHT on their assets ever since.
However, draft legislation was published recently which aims to catch much “Rysaffe-type” tax avoidance by preventing multiple trusts benefitting from multiple IHT nil rate bands.
For trusts set up before 10th December 2014, the benefits of the IHT planning using multiple trusts will remain. However, those who have made wills leaving some or all of their estate to such protected pre-10 December 2014 trusts would be well advised to review their will with their legal advisor, in light of the draft legislation (likely to become law on 6th April 2015).
For more information on the proposed new IHT rules for trusts, please contact the partner at Hunters having responsibility for your legal matters, or (for new enquiries) please contact a partner in the Private Client team.