Periodic charges and multiple trusts

Broadly speaking, if an individual settles an amount up to their available NRB into a discretionary trust, there is no lifetime inheritance tax (IHT) to pay.

The available NRB, for these purposes, is the NRB (currently £325,000) reduced by cumulative chargeable lifetime transfers (CLTs) made by the individual in the seven years prior to creating the trust. Outright gifts, so potentially exempt transfers, are ignored for these purposes.

Example:

Jade sets up a discretionary trust on 22 June 2021 for £175,000. Six months later she decides to set up another discretionary trust for £175,000.

Jade regularly uses her annual IHT exemption of £3,000. She has not, however, made any other gifts.

The IHT effect of these transfers would be as follows:

Trust one – there would be no lifetime IHT to pay, because the amount settled is within Jade’s available NRB of £325,000.

Trust two – the available NRB would be reduced by the earlier transfer into trust one, so £325,000 - £175,000 = £150,000. This means there would be lifetime IHT to pay on the excess amount of £25,000. This would be payable at 20%, so £5,000 if paid by the trustees, or 25%, so £6,250, if paid by Jade.

Given that the two trusts are essentially aggregated to determine whether or not any lifetime IHT would be payable, is it worth setting up two trusts to begin with, or should Jade have just ‘topped-up’ the first trust?

While the IHT payable at outset is as illustrated above, it can nonetheless be advantageous to set up multiple trusts to reduce the tax payable on future periodic/exit charges.

For example, assume the value of the trust funds have increased to £260,000 and £262,000 respectively by the ten-year anniversary:

If by the ten-year anniversary the NRB has increased to £400,000, the available NRB for each trust will be as follows:

The periodic charge would therefore be calculated as follows:

In this example, it is clear that trust one benefits from the full NRB at the time of the periodic charge, whereas the available NRB for trust two is reduced by the earlier CLT of £175,000, which results in IHT being payable.

How would this have differed if Jade had instead ‘topped-up’ the first trust?

*£260,000 + £262,000 = £522,000.

So, in this scenario, had Jade invested £350,000 into one trust, and assuming the NRB had still increased to £400,000, the IHT payable on the periodic charge is £5,100 higher compared to her settling two trusts, one after the other. Therefore, by creating multiple trusts, it is possible for individuals to benefit from IHT savings in respect of any periodic charges. This is because each trust will benefit from its own NRB. However, as demonstrated by this example, each time a trust is created, there will be a chargeable transfer which reduces the available NRB for each trust which follows it.

Summary

This article provides an overview of the IHT savings in relation to periodic charges where an individual sets up multiple trusts. The same principles apply to IHT exit/proportionate charges.

It is, however, important to note that if an individual does choose to settle more than one trust, they ought to ensure that each trust is set up on different days – ideally leaving at least a few months between creating each of the trusts. This is because if the trusts are settled on the same day by the same settlor, they will be treated as related settlements, which effectively means that the amounts settled would be aggregated and treated as a single settlement when calculating IHT charges. So, only one NRB would be available.

Also, where more than one trust is set up, it will be necessary to register each trust separately with HMRC.