When we set up discretionary trusts we of course have to bear in mind that these will be subject to the relevant property regime for IHT. This means that the value of the trust is taxed to IHT at up to 6% every 10 years, and to a proportion of 6% on any exit of capital out between 10 year anniversaries.
It is possible to set up multiple trusts to help minimise those charges. Each trust benefits from its own nil rate band and if and so long as that trust is worth less than the nil rate band then no such ten year and exit charges arise. For example, if there are three trusts each worth £300k, rather than one trust worth £900k, these charges are not payable. This works particularly well if the assets have entered the trusts using BPR or APR and so are not limited by the nil rate band on entry.
The use of multiple trusts does not work to minimise entry charges, or the treatment on death of gifts to trust made within the seven years before; they are still limited by the total one nil rate band.
The Rysaffe case ([2003] EWCA Civ 356) in 2003 looked at whether this multiple trusts planning works to minimise ten year and exit charges in the life of the trust. The case involved a series of gifts on consecutive days. It is for this reason that gifts to multiple trusts for this planning are made on different days.
The government had an opportunity to close down this planning. They opted not to do so in 2015 and instead limited the changes they made, to same day settlements only. This means that if someone funds multiple trusts on different days then this still works. What does not now work under same day settlements is pilot trusts – where a will left the estate to five trusts – in that case each is deemed settled on the same day as the date of death and therefore all are effectively treated as one for ten year and exit charges. Multiple trusts funded in lifetime are not affected by this as they can be funded on different days.
Where an asset is fragmented in ownership then the total value across the various pots can be added together and the total divided, so as to avoid a claim by the taxpayer that each vehicle only holds a minority which has a discounted value. This does not apply to trusts. This related property rule does not then remove the ability to use multiple trusts.
Having had the chance to close down this planning after the Rysaffe case of 2003, and as part of FA 2015, and not taken it, where are we now? The trust consultation paper of February 2025 is only on BPR/APR changes announced in the Budget and how they may affect trusts holding such property. However, does this show a direction of travel on using multiple trusts?
The consultation explains clearly that the use of multiple trusts works to minimise ten year and exit charges. The consultation says that those trusts set up post-30 October 2024 will only have one £1m allowance among them. This £1m will be applied chronologically. If one trust is set up with £1m it has the whole £1m allowance and the next trust has none. Trusts set up on the same day will have their £1m allowance apportioned. There is a technical difference here in that the nil rate band affects the rate applied to ten year and exit charges. The APR/BPR £1m allowance affects the value upon which that rate is applied. But does this consultation show a direction of travel towards a sharing of the nil rate band with multiple trusts?
The consultation also explains clearly that the use of multiple trusts works to discount values by fragmenting an asset into multiple trusts. The consultation goes on to say that the government seeks views on whether related property rules should be applied to trusts to avoid those values being discounted. That is different from using various trusts to mitigate ten year and exit charges. However, does this show a direction of travel towards seeing multiple trusts as ‘one’?
If the use of multiple trusts to reduce ten year and exit charges were to be removed, one may still want to set up multiple trusts to provide different trusts with different purposes for a family, for example one for grandchildren to be invested long term, and one for children to create income streams. If multiple trusts were to be added together for the purposes of ten year and exit charges, those charges are still only a maximum of 6% every ten years, or 0.6% per annum, those charges can be foreseen and the funding planned for. In exchange for 6% IHT, one gets all of the benefits of the trust – being the ability to avoid a 40% IHT charge on death, control, flexibility and asset protection. These were probably the very reasons for setting up the trust(s) and should not be lost sight of.
Leigh Gould, Brodies
When we set up discretionary trusts we of course have to bear in mind that these will be subject to the relevant property regime for IHT. This means that the value of the trust is taxed to IHT at up to 6% every 10 years, and to a proportion of 6% on any exit of capital out between 10 year anniversaries.
It is possible to set up multiple trusts to help minimise those charges. Each trust benefits from its own nil rate band and if and so long as that trust is worth less than the nil rate band then no such ten year and exit charges arise. For example, if there are three trusts each worth £300k, rather than one trust worth £900k, these charges are not payable. This works particularly well if the assets have entered the trusts using BPR or APR and so are not limited by the nil rate band on entry.
The use of multiple trusts does not work to minimise entry charges, or the treatment on death of gifts to trust made within the seven years before; they are still limited by the total one nil rate band.
The Rysaffe case ([2003] EWCA Civ 356) in 2003 looked at whether this multiple trusts planning works to minimise ten year and exit charges in the life of the trust. The case involved a series of gifts on consecutive days. It is for this reason that gifts to multiple trusts for this planning are made on different days.
The government had an opportunity to close down this planning. They opted not to do so in 2015 and instead limited the changes they made, to same day settlements only. This means that if someone funds multiple trusts on different days then this still works. What does not now work under same day settlements is pilot trusts – where a will left the estate to five trusts – in that case each is deemed settled on the same day as the date of death and therefore all are effectively treated as one for ten year and exit charges. Multiple trusts funded in lifetime are not affected by this as they can be funded on different days.
Where an asset is fragmented in ownership then the total value across the various pots can be added together and the total divided, so as to avoid a claim by the taxpayer that each vehicle only holds a minority which has a discounted value. This does not apply to trusts. This related property rule does not then remove the ability to use multiple trusts.
Having had the chance to close down this planning after the Rysaffe case of 2003, and as part of FA 2015, and not taken it, where are we now? The trust consultation paper of February 2025 is only on BPR/APR changes announced in the Budget and how they may affect trusts holding such property. However, does this show a direction of travel on using multiple trusts?
The consultation explains clearly that the use of multiple trusts works to minimise ten year and exit charges. The consultation says that those trusts set up post-30 October 2024 will only have one £1m allowance among them. This £1m will be applied chronologically. If one trust is set up with £1m it has the whole £1m allowance and the next trust has none. Trusts set up on the same day will have their £1m allowance apportioned. There is a technical difference here in that the nil rate band affects the rate applied to ten year and exit charges. The APR/BPR £1m allowance affects the value upon which that rate is applied. But does this consultation show a direction of travel towards a sharing of the nil rate band with multiple trusts?
The consultation also explains clearly that the use of multiple trusts works to discount values by fragmenting an asset into multiple trusts. The consultation goes on to say that the government seeks views on whether related property rules should be applied to trusts to avoid those values being discounted. That is different from using various trusts to mitigate ten year and exit charges. However, does this show a direction of travel towards seeing multiple trusts as ‘one’?
If the use of multiple trusts to reduce ten year and exit charges were to be removed, one may still want to set up multiple trusts to provide different trusts with different purposes for a family, for example one for grandchildren to be invested long term, and one for children to create income streams. If multiple trusts were to be added together for the purposes of ten year and exit charges, those charges are still only a maximum of 6% every ten years, or 0.6% per annum, those charges can be foreseen and the funding planned for. In exchange for 6% IHT, one gets all of the benefits of the trust – being the ability to avoid a 40% IHT charge on death, control, flexibility and asset protection. These were probably the very reasons for setting up the trust(s) and should not be lost sight of.
Leigh Gould, Brodies
