The government has changed the taxation of trusts which particularly impacts the future use of pilot trusts.

Pilot trusts are used for all types of planning and are usually flexible, discretionary trusts that lay dormant until further funds are added.

Generally, a settlor establishes a number of pilot trusts and puts a nominal sum in each one ñ often £10. The trusts then sit and wait for further funds to be added to them, usually on death of the settlor from their life assurance proceeds, pension death benefits or shares from their residuary estate for example.

Before 10 December 2014, each pilot trust had its own nil rate band (currently £325,000) and provided each trust did not exceed its own nil rate threshold and the other trusts were established on different days, the trusts were not charged to inheritance tax. If a person died leaving a Will which transferred their residuary estate into the right number of pilot trusts, very significant – if not complete – inheritance tax savings could be made during the lifetime of the pilot trusts (potentially 125 years).

The government has been determined to reduce the inheritance tax advantages of trusts and so on 6 April 2015 new rules concerning the taxation of trusts were to be brought into effect.

Under the new rules, HMRC would start looking at the total amount in all the trusts created by the same person, rather than at each trust individually. A 6% inheritance tax charge would be applied on anything above the nil rate threshold every ten years thus removing the inheritance tax saving that was made during the life of the trust. Consequently beneficiaries may prefer to inherit outright and pay inheritance tax on their deaths rather than fund the tax every 10 years.

A surprise development in the Budget means the new rules will no longer be effective on 6 April 2015, instead they will potentially be legislated in a future Finance Bill. Despite the delay in legislation, it is important proper consideration is given to the impact the changes may have on your affairs and we recommend you act sooner rather than later.

If you would to like to find out more about the changes to the taxation of pilot trusts please feel free to contact us on 020 8537 3448 or send an email to info@ashtongrace.co.uk

Ashton Grace ñ specialists in Wills & Estate Planning