The Spring Statement in March showed the Treasury’s tax take from IHT is predicted to almost double by the end of this Parliament, with receipts expected to reach £14.3bn in 2029-30, from £8.4bn currently.
There are many options for advisers and clients to consider when planning to reduce their taxable estate by spending it, gifting it and/or sheltering it.
However, in light of the proposed changes to agricultural and business relief and bringing unused pension funds into the scope of IHT some of these options might not seem as beneficial as before.
The Rysaffe planning principle was popular prior to the introduction of ‘same day additions’ legislation in December 2014
One option, subject to the client’s personal circumstances, could involve using multiple different types of trusts, set up at different times during their lifetime.
The Rysaffe planning principle was popular prior to the introduction of “same day additions” legislation in December 2014.
This change meant creating multiple pilot trusts on consecutive days with small amounts, with larger values being transferred on death via the will and each trust having its own nil rate band for the principal charge calculation.
These have now ceased to be tax efficient, as funds added on the same day to multiple trusts will need to be included in the principal and exit charge calculations.
However, this principle can still be used during a client’s lifetime.
For larger investments, clients may wish to split their investment across multiple trusts rather than making one large investment as each trust would have its own nil rate band on the tenth anniversary.
This may work particularly well for gift and loan or loan trusts as the cumulative gifts to the trustees are likely to be covered by an exemption.
Example:
Vanessa has a £700,000 inheritance and is looking to invest for the long term for the benefit of her children and future grandchildren.
She needs some access to the money at the moment as her house is undergoing renovations but is keen to get as much growth outside her estate as soon as possible with the potential changes to pension and IHT in mind.
Potential option 1
Create one discretionary loan trust for £700,000 investing in an offshore investment bond.
This gives flexibility with a wide range of potential beneficiaries and gives her access to the loan via the 5% tax deferred allowance from the offshore bond payable back over the next 20 years but also recall this loan back in full at any time.
This may give rise to income tax consequences upon a chargeable event gain depending on the size of the gain, her other income and the tax allowances available at the time.
As this is a loan and not a gift, any outstanding loan on her death remains in her estate for inheritance tax purposes.
With this in mind consideration should be given to making provision in her will as to how any outstanding loan is dealt with on her death.
She has the option to waive her right to the loan making it a gift. However consideration needs to be given to the value at the time as there could be entry charges to pay if the gift exceeds her available nil rate band, which could be likely with an investment of £700,000.
Potential option 2
Create four discretionary loan trusts for £175,000 in four offshore investment bonds.
As above, there is flexibility for potential beneficiaries and gives her access to the loan via the 5% tax deferred allowance from each bond but there are some additional benefits when compared with option 2:
• She doesn’t have to take 5% from all the bonds, leaving growth on the investment for the benefit of the beneficiaries
• If she wanted to recall any of the loans back, then the CEG could be smaller when compared to one £700,000 bond
• She could waive one of the loans and as the value is lower, and depending on the available nil rate band at the time it is not likely to cause entry charges. She could do this every seven years depending on her circumstances at the time.
Additionally, multiple pilot trusts which hold life assurance policies could also be effective, especially with more clients looking at protection in light of the potential changes to pensions and IHT.
If the sum assured under one policy exceeds the nil rate band (currently £325,000) and is paid to the trustee, there could be principal and exit charges applicable.
If the settlor split the sum assured over several smaller policies, each on a different day and each subject to its own trust, then each trust will then have its own nil rate band, potentially nullifying or reducing any principal or exit charges.
These trusts would not be caught by the same day additions on death of the settlor as the life assurance policies are created on different days and subject to different trusts.
The value of the asset in the trust will increase following the death of the life assured, but this is not an addition to the trust as the policy is already a trust asset, it is merely an increase in the value.
When creating multiple trusts, consideration does need to be given to the increase in potential costs, administration, and potential trust registration requirements, and weighed up against the potential savings in taxation.
Julia Peake is technical manager at Nucleus
