Some eight years ago in 2013, we issued a video explaining how the use of pilot trusts work for inheritance tax planning and then a second video that HMRC was going to contest that only one inheritance tax nil rate band should be used.
What Are Pilot Trusts?
See 2013 Video Pilot Trusts
You can make gifts to a discretionary trust today, however if you go over the nil rate inheritance tax allowance you also create an inheritance tax liability payable today. There is also a periodic charge every 10 years if the trust value exceeds the nil rate band.
Pilot trusts are a series of small discretionary trusts, where you set up one per day or per week i.e., they are unconnected each with a small amount say just £10 and definitely under the nil rate band and must be set up before your death.
When you die, your estate will pay full inheritance tax if due and the balance of your estate after taxes can then be distributed by your will to each small pilot trust. For future generations there was then potentially no inheritance tax due if the trust value were below the nil rate band nor the 10-year, 6% periodic charge. In any event, it meant that for future generations, instead of just one nil rate trust at £325,000, there were multiple pilot trusts with multiple £325,000 nil rate bands. A massive increase in inheritance tax mitigation.
See 2013 Video Pilot Trusts 2013
In 2013, HMRC contested having multiple nil rate bands and claimed that as it was a transfer of wealth on death i.e., at the same time, the combined pilot trusts should just share only one inheritance tax nil rate band. In the case Rysaffe Trustees v Inland Revenue Commissioners, it was ruled in favour of HMRC that only one nil rate band must be shared by all pilot lifetime trusts.
Appeal: The trustees appealed to the High Court and the above ruling was overturned so things continued as normal.
HMRC then issued a series of consultation papers resulting in the government of the day changing the law.
Financial (No.2) Act 2015 - effective 6 April 2017
The above act enabled an amendment to the Inheritance Taxes Act 1984 allowing that pilot trusts would be allowed but to keep individual nil rate bands for each individual trust, no more than £5,000 could be transferred to each trust on death. To our mind this has made pilot trusts redundant as an efficient inheritance planning tool for future generations.
Successive generations could contribute on their deaths to gradually build the trusts up, but we suggest this is not efficient.
That said, there are some limited ways that pilot trusts may still be effective, and you should contact us to discuss these.