Rules allow for inheritance tax planning

David Hill INLT 45-099-PSB
David Hill INLT 45-099-PSB

One of the unexpected outcomes from the small print in the Chancellor’s autumn statement was dropping the plans to only allow £325,000 to be put tax-free into discretionary trusts during an individual’s lifetime.

It had been proposed that any trusts set up after June, 2014 would have to share the £325,000 nil-rate band, but these plans were dropped, keeping the door open to shelter a further £325,000 into trust every seven years.

This does mean that wealthy families who are looking to pass wealth down through the generations without the deduction of tax should start planning as early as possible. The rules will, however, only allow one nil-rate band on death, so multiple trusts set up in a will to receive assets on death will have to share the nil-rate band in future.

This will result in higher tax charges every 10 years for some families. It is therefore generally advisable to set up trusts during your lifetime to distribute assets, rather than having trusts created in your will.

A trust that is set up now can be registered with HMRC and can be used for lifetime gifts, whereas if a trust is set up in a will, it doesn’t come into existence until the individual dies. This means that it may not work, as we don’t know what the rules will be at the time of death.

We also had confirmation at the end of 2014 that unused pension pots can pass free from Inheritance tax to the next generation at any age. Instead of inheritance tax, income tax may be paid by the recipient. Again a specific type of trust must be used to ensure the pension pot passes tax-free if death occurs before age 75. This is because while there is no inheritance tax due when paying out the pension fund to the surviving spouse, the money will be potentially liable for inheritance tax when the surviving spouse passes away.

These trusts only cost a few hundred pounds to set up and we have seen cases where the tax saving is well in excess of £100,000.

David Hill is a Chartered Financial Planner and Trust & Estate practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: