Third time lucky for HMRC? Reform of the IHT rules applying to trusts

By Alex Barker and Ian Bradshaw

Last year, HMRC proposed that an individual’s IHT tax-free allowance (the nil-rate band) should be split across all trusts that he or she set up. At the time, the plans attracted some criticism and did not make the cut when the Finance Bill 2014 was unveiled. But now the plans have resurfaced in slightly amended form. What would the changes mean?

At the moment, a lawful estate planning strategy involves setting up multiple trusts on different days, in order that each trust will effectively have its own nil-rate band (currently £325,000). A series of smaller trusts, in comparison with one larger trust, can reduce the impact of the 10-year charge and benefit from multiple nil-rate band allowances.

HMRC has announced a consultation on proposals to restrict this practice (in fact, the third consultation on the same topic). Under the plans, settlements of property made during the settlor’s lifetime would be subject to only one nil-rate band. This would be known as the ‘settlement nil-rate band’, and would be separate from the current, personal nil-rate band. The amended proposals would allow the settlor to choose how the settlement nil-rate band is split between his or her various trusts, avoiding the situation where a portion of the allowance could be wasted on a trust that lacks the necessary assets to absorb it…

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