The Academies Financial Handbook is updated annually by the Department for Education and the Education and Skills Funding Agency; it contains a number of governance requirements for academy trusts.
These trusts are liable to a charge to Inheritance Tax every ten years. Until 6th June 2014 each trust deed had its own Nil Rate Band. An individual (known as “the settlor”) could therefore create a number of trusts (also known as settlements) and each would have its own nil rate band (NRB). In simple terms any value in excess of that is taxed at a maximum rate of 6%. The rules for calculating the actual amount of tax are complex and require detailed records to be kept and maintained.
HMRC’s new proposal
HMRC wants to simplify this. More importantly HMRC proposes that a settlor should only have one NRB – to be known as a Settlement Nil Rate Band (SNRB) – which s/he can allocate on a percentage split between all trusts they create. The SNRB will increase in value in line with the normal NRB and the proposal will include trusts created by wills.
The settlor will have to elect (by way of an HMRC form) the share of the SNRB allocated to the trust before the first ten year anniversary.
Once the first ten year anniversary has passed, an election cannot be varied unless further assets are added and there is any SNRB available. It will also not be possible to recycle the SNRB once a trust has been wound up and if any SNRB has not been allocated before death the executors have two years from the death within which to allocate it.
These changes will apply to all trusts created and to any additions to existing trusts on or after 6th June 2014.
If you already have a trust, you should consider:
- Detailing all trusts you have created – including trusts set up using life insurance deeds etc
- Checking with your advisers if you are committed to regular or one off payments to any existing trust or policy
- Reviewing your will. There are separate rules for trusts arising under wills which may mean they are still appropriate
- Checking your pension provision and any pilot settlements created to receive any lump sum death benefit
These will help your solicitor, financial adviser and/or accountant advise on what further action to take.
If you don’t yet have a discretionary trust in place
The changes will not mean discretionary trusts can no longer be created. For many they can be particularly useful as a way of:
- Deferring, if not avoiding a capital gains tax liability on a gift
- Inheritance Tax mitigation
- Making gifts without giving control to the recipient
- Protecting entitlement to benefits for a recipient
HMRC’s suggestions are still only proposals. The consultation ends in August with the intention that the changes be introduced in the Finance Act 2015. The changes will severely limit the opportunity for using trusts to mitigate tax, however trusts will still have their uses and some will not be affected, including trusts for disabled or vulnerable individuals.
For more information
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