Having multiple trusts with each below the IHT limit of £325,000 has been a popular trust planning strategy for some time. While there are no tax savings to be had initially, the effect is that you can reduce the tax charge every ten years when tax is due and also reduce the exit charge.
For trusts set up before December 2014, customers have needed to ensure that top-ups occur on consecutive days,to avoid paying any unnecessary tax charges. Having multiple trusts also increases flexibility should trustees wish to set up a variety of investment strategies. However, in April 2016, more discretionary trusts became subject to the periodic tax charge. How has this affected trust planning?
Change in tax regime
The increase in the number of discretionary trusts being subject to the periodic tax charge is largely due to changes in interest in possession trust ten years earlier. This affected the tax regime, from potentially exempt transfer tax to relevant property tax. In turn, it resulted in insurance companies moving away from offering possession trusts and offering discretionary trusts instead.
It means that from April 2016, the trustees of the first discretionary trusts need to calculate whether or not they are liable for tax – something that may be new to those who have only used schemes that are insurance-based.
Keeping up with legislation
The calculation can be complex, taking into account trust-related tax liabilities for the seven years prior to the trust’s creation and whether they’re below the nil rate band. Properties added to or withdrawn from the trust must also be considered.
Incorporating changes like this into back office systems for IFAs is important for delivering a seamless service to their clients. Back office systems providers like http://www.intelliflo.com/ keep abreast with changes to legislation such as the Finance Bill.
With trust planning being such an important part of wealth planning strategies, the ability to provide value for money advice is crucial. Strategies such as using multiple nil rate bands on a series of smaller trusts is a good way for advisers to help their clients plan financially and mitigate any tax charges in the future. Providing back office systems to cope with changes to legislation means that IFAs can remain as productive as ever.