The proposals in the consultation document cover new restrictions on the nil-rate band available to trusts set up by a single settlor which:
- remove the effectiveness of ‘Pilot trusts’ (multiple trusts, each set up with a small capital settlement to obtain a full nil-rate band (NRB);
- set a flat tax rate of 6% on transfers above the trust’s nil-rate band (NRB); and
- require the settlor to decide how the new settlement nil-rate band (SNRB) for lifetime trusts is to be apportioned.
The 6 June consultation document does not contain anything relating to the rules on accumulated income.
Existing trusts grandfathered and should not have more property added
Although the new rules do not take effect until 6 April2015 they apply to all trusts created after 6 June 2014 and there are to be anti-forestalling rules. Therefore from6 June 2014 onwards:
- all new lifetime trusts;
- additions to existing trusts; and
- variations of the terms of trusts that make trust property into relevant property
will enjoy no NRB unless the settlor allocates part of the SNRB to that trust. Anti-forestalling rules will also apply to prevent attempts to get round the new rules.
Settlement nil-rate band will need to be claimed
One NRB will be available to each individual settlor to allocate as he wishes by specifying the percentage of the SNRB to be allocated between settlements in an election. By using a percentage based allocation, the actual amount of the SNRB allocated will increase when the nil rate band increases.
The onus is upon the settlor to notify the trustees what percentage of the SNRB is allocated to a given trust, and to ensure that no more than the amount of the single NRB is allocated. There is no automatic default allocation. If no SNRB is allocated the trustees are obliged to calculate the IHT on the basis that no SNRB is available, thus:
- the entire value of the trust fund on the ten year anniversary (TYA) will be taxable at 6% (reduced for periods when property was not relevant property); and
- the entire value of property leaving a trust will be charged at 6%, reduced for the number of complete quarters remaining before the next ten-year anniversary.
It will still be possible for a different settlor to settle property on a relevant property trust already settled by another person. These will be treated as different settlements as is the case now, and the second settlor will be able to allocate their SNRB provided it is clear that it is their own property which has been settled.
If a trust is wound up by the settlor, it will be possible for the settlor to reallocate the SNRB to another trust.
Opportunities and threats
The consultation process is continuing but we know enough about the shape of the new rules now to prepare for 6 April 2015.
- Trustees of existing trusts need to decide whether:
- to appoint out capital before 6 April 2015; and/or
- income should be distributed to avoid it being treated as accumulated capital at the10 year charge point.
- Settlors should not add property to existing trusts (not something to be recommended under the existing rules but now even more potentially costly).
Individuals also need to review their wills to establish whether relevant property trusts are being created on death and what provision will be needed for the SNRB. Personal Representatives will need to be aware that they will only have two years from the death of the settlor to allocate the SNRB.