Lifetime Trusts

We all know that trusts in general and Lifetime Trusts in particular are a very important part of our estate planner's toolkit. In the right circumstances Lifetime Trusts have substantial benefits for our clients and because of the level of fees involved are good income for will writers and estate planners. But Lifetime Trusts also come with serious ongoing responsibilities.

My concern is that many IPW members are not aware of the potential pitfalls of having clients with ongoing Lifetime Trusts, and even when they are aware don't know how to get help with matters, which are effectively trust administration and taxation matters they have no experience of. The problem of not dealing with those issues is tax liabilities and penalties and fines that can be substantial and lead to complaints at best and negligence claims at worst.   You should be under no illusion that this is a very real problem and has massive potential to damage our reputation and to cause financial loss. This is a concern Oliver shares " I don't know for certain but I'm very concerned that the reality is that some members don't even know the periodic charge exists, and certainly didn't make the client aware of it". There are a number of Lifetime Trusts ongoing management issues as well as impending issues and legislation changes being introduced by HMRC regarding a new anti-money laundering directive (AMLD) involving trusts that will require trustees to act.

The main purpose of this article is, firstly to make members, and their clients, aware of their future obligations and the pitfalls of not managing those obligations and, secondly let you know there is help available.

The three impending Trust issues we all have to be aware of are: 

1. Compulsory registration of Trusts with HMRC
2. Periodic charges/Anniversary taxes (every 10 years)
3. Inheritance tax and the new Residence Nil Rate Band (RNRB)

Trust Registration.

From the 1st March 2022 (only 18 months away) all Lifetime Trusts that hold assets in excess of £100/ IOU’s or property will have to registered with HMRC.   

This will require the nominated trustees to register the Trust informing HMRC of the trustees, all potential beneficiaries and the value of the assets the Trust holds. This will help HMRC determine when the Lifetime Trust is liable for any periodic charges, commonly known as the ten-year charge. Are you ready for this? 

Periodic Charges.

Lifetime Trusts are subject to IHT charges on entry and exit as well as being assessed every ten years. If Trust assets exceed the Nil Rate Band an IHT charge is created based on a 6% charge on asset value over the Nil Rate Band.  

With property values increasing and the NRB still at £325,00 it’s very easy for Lifetime Trusts to inflate over the NRB and create an IHT liability.   

I recently had a client whose Family Trust was coming up to the 10-year anniversary and the property had increased from £275k to over £400k whilst it was in Trust. The tax charge would have been over £4,500 as well as the cost to do the tax return.  

With the help of APL we were able to create a new trust that avoids the NRB/periodic charge and transfer the property to the new trust – we had only a two week window to do it but we managed to do it. 

Alan said “I’m really quite worried that most will writers don’t do regular reviews and may rely on professional trustees when my experience of those professional trustees is that they are failing in their fiduciary duties and are not carrying out reviews. No-one seems to care. These potential problems can be avoided but you can’t rely on others and do need to be proactive.”  What are you doing to review clients with lifetime discretionary trusts to avoid these issues arising?

Inheritance Tax (IHT) & The RNRB.

In 2017 the government introduced an additional IHT allowance that increased the amount you could leave tax free when you die to a potential £500k per person or £1M for a married couple. This new allowance is called the Residence Nil Rate Band (RNRB) and from April 2020 it is set at £175k.  But, as with most HMRC concessions, there is catch – the new RNRB is conditional upon three things: 

1. You must have lineal descendants, i.e. children, grandchildren, stepchildren.
2. To receive the full £175,000 per person your house must be worth at least the amount you claim so a couple with a home worth £200k will only get £200k in total. 
3.  The value of the property on which you claim the RNRB allowance must pass directly to lineal descendants as a result of your death. 

If you use a Discretionary Trust your estate will not receive the RNRB allowance. HMRC’s view is straight forward; if the asset does not pass as a direct result of the death of the owner the RNRB is not available.

This potential problem applies to Discretionary Trusts in Wills as well the standard Family Trust type arrangement.  How many clients do you have where the RNRB allowance will fail because the family home is either in lifetime trust or is directed into a discretionary trust by the Will?

Oliver said ”One of things that scares me is the lack of technical knowledge I see on a regular basis when clients are being advised on trusts. There are too many advisors who are not even self-regulated; I can see a big mis-selling scandal in a few years’ time.”  I have to say I completely agree.

Earlier this year I came across a client at a seminar who had set up a Lifetime Trust (with a non-IPW member) into which they had transferred the main residence and a second property they had inherited 25+ years ago. The transfer had created a substantial Capital Gains Tax liability that had never been reported. Tax and penalties could have amounted to as much as £100,000.  With APL’s help we were able to undo to previous work and sort out what was a complete mess.    

Remember, even if the value of the property held in a Lifetime Trust is below the NRB, the whole estate may be worth more than the NRB, meaning they need the RNRB to be available, many Lifetime Trusts are not written in a way that makes the RNRB available. The Trust should be reviewed, along with any existing will, and steps taken to ensure the trust is brought up to current standards, and registration considered. 

Options are available. Property can be appointed to a new Trust, the existing Trust can be amended in some cases, these are all things specialist law firms like APL can assist with.

There are other trust administration issues to consider as well, particularly:  

1. Trusts not being fully utilised
2. Changing trustees
3. Regular reviews 

But we will look at these next time round, so please keep an eye out for the second part of this article.

In summary, there are potential issues to be aware of but it’s not all doom and gloom. Of course, all the above potential problems can be avoided by you and your firm being proactive and making sure the Trust provider you’re working with can supply the service you and your clients deserve, not just in terms of drafting but also in terms of ongoing administration.

Written by Council Member, Paul Dodsworth, with input from Oliver Cooper and Alan McAloon.