In previous budgets and announcements, the government stated they would alter the way trusts were taxed. The recent summer budget of 2015 confirmed those changes in the presentation of new rules.

The use of numerous nil rate band trusts with their own, individual nil rate band – currently £325,000 for the tax year 2015/16 and frozen until 2020/21 – still exists.

However, under the new rules, such trusts must be created on different days and must not fall foul of having same day additions, explained below, otherwise the tax advantages of setting up multiple nil rate band trusts will be lost.

Pilot Trust Basics

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 on different days and puts a nominal sum in each one, say £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.

Old Trust Rules

Before 10 December 2014, each pilot trust had its own nil rate band. Provided each trust did not exceed its own nil rate band threshold and other pilot 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 inheritance tax savings could be made during the lifetime of the pilot trusts (up to 125 years).

It was critical that multiple pilot trusts were not set up on the same day as the value of other pilot trusts created on the same day would also be included when calculating the tax.

New Trust Rules

The important changes centre around that of same-day additions.

Previously, only the value of other trusts created on the same day were included in the tax calculation of trusts. This is no longer the case.

Now when a settlor adds value to a trust, should they also add value to other trusts on the same day, that value will also be included in the calculation along with the initial value of those other trusts, regardless of when those other trusts were created. This is what is referred to as same day additions.

Existing Trusts

The old rules still apply to pilot trusts created prior to 10 December 2014 provided same day additions have not been made to the trusts since that date, subject to transitional rules.

Care must be taken to avoid making same day additions otherwise the tax advantages of multiple pilot trusts under the old rules will be lost.

What to do next

In light of the tax changes to trusts, it is important to revisit your planning arrangements, particularly if you make use of multiple pilot trusts as the new rules are likely to have an impact on your affairs.

You should also seek advice when thinking about making additions to existing trusts.

For more information on Inheritance Tax or to find out how the changes to Pilot Trusts may affect you, please contact us on 0208 537 3448 or wills@ashtongrace.co.uk.

Ashton Grace – Specialists in Wills & Estate Planning