Summer Budget 2015: Confirmation of changes to Inheritance Tax on trusts

Relevant property trusts are subject to a separate Inheritance Tax (IHT) charging regime applying on the tenth anniversary of the commencement of the trust and on capital distributions. Many had been able to reduce these charges through the creation of a series of nominal ‘pilot trusts’ on different days. Substantial funds were later added to these trusts on the same day, usually on death, to benefit from multiple nil rate bands.

HMRC had been consulting on counteracting the IHT advantages of pilot trusts and this culminated in targeted anti-avoidance being announced in the 2014 Autumn Statement with draft legislation following. It has been confirmed that this legislation will be included in the second 2015 Finance Bill.

Broadly, ‘same-day additions’ to more than one relevant property trust on or after 10 December 2014 (the date the draft legislation was first published) will be aggregated for the purpose of calculating IHT charges. A transitional rule will apply to transfers on death before 6 April 2017 pursuant to Wills executed pre-10 December 2014. Same day additions totalling £5,000 or less will be excluded from the new rule.

A number of other minor changes to the relevant property regime have also been confirmed:

  1. Claims for the heritage property ‘conditional exemption’ will be able to be made within two years of the ten year anniversary rather than in advance (for anniversaries occurring on or after the date of Royal Assent);
  2. Removal of the ‘Frankland’ trap that meant that certain appointments from a Will trust in the three months after death were not read back to death (applies to all deaths occurring on or after 10 December 2014); and

Ensuring that a successive life interest to a spouse will only remain outside the relevant property regime if it is a qualifying interest in possession rather than simply an interest in possession (applies to succession arising after the date of Royal Assent).

Although the same-day additions rule is unwelcome, in that it counters the use of pilot trusts, confirmation of the changes will allow practitioners to finally be able to advise with certainty on relevant property trusts. The removal of the Frankland trap is welcome, in particular as appointments to a spouse in the first three months after death will be able to be read back to death to benefit from spousal exemption.