My last post on what might be called the new regime applying to relevant property trusts briefly considered some of the positives. It is now time to turn the spotlight on a couple of potential issues which trustees should be aware of.
Firstly, there has been a major sea change with respect to income which is retained within a trust.
The Old Rules
Under the rules which applied prior to 6 April 2014, income which was accumulated to capital part way through a 10 year period was treated as ‘added’ to the settlement on the date of accumulation. The overall rate of tax on those (and any other capital additions) would be reduced as that capital had not been relevant property throughout the entire 10 year period.
The New Rules
In relation to 10 year anniversary charges arising on or after 6 April 2014, income which has been retained in the settlement for five years or more, and not accumulated, will be treated as capital. It addition, such income will be treated as having been comprised in the settlement for the full 10 year period. This means that the full 6% rate of charge will apply to it.
It appears to be the case that if the trustees formally resolve to accumulate that income at some point prior to the 10 year anniversary, that income will only be treated as capital from the date of accumulation and the charges will be reduced accordingly. Trustees are therefore well advised to review the amounts of retained income in the settlement in good time before the 10 year charge ( say at least six months to one year before is recommended) and formally to resolve to accumulate income which has arisen during the first five years since the date of the settlement, or the last 10 year anniversary if later, to mimimise the exposure to inheritance tax.
Secondly, there is the thorny issue of multiple settlements.
The Old Rules
A common form of tax planning to secure a number of nil rate bands has historically been to set up a series of settlements on different days and add property to them on the same day. The Rysaffe case confirmed that this had the effect of giving each settlement a separate nil rate band, an extremely useful long term planning strategy.
The New Rules
The new rules prevent this tax planning exercise where property is settled on or after 10 December 2014.
What is perhaps less well appreciated is that the new rules also apply to existing settlements where property has been added to them on or after 10 December 2014 and the relevant property charge arises after 6 April 2015.
Trustees who are aware that a settlement is part of such a series of settlements should take care to ensure that there are no additions which could ‘taint’ the trust for the purposes of these rules.