Pilot Trusts

Often this has been by way of a trust, since the thought of giving large sums of money outright to 18-year-olds is terrifying!

Before the 2006 Finance Act, grandparents provided for their grandchildren by way of a favourable form of trust.

Known as Accumulation and Maintenance Trusts, they allowed for income to be paid to the young people while the capital was looked after by the trustees. Since 2006 A&M Trusts have all but disappeared.

More recently, the common way of leaving assets in trust has been via Discretionary Trusts, but these may be liable to Inheritance Tax on every tenth anniversary and when capital is paid out to beneficiaries in between each anniversary.

If grandparents want the flexibility of a Discretionary Trust without the impact of IHT every ten years, they should look at Pilot Trusts.

A trust is entitled to its own nil rate band for IHT, as long as each trust is created on different days.

The advice is to form small Pilot Trusts on different days now, and then a further trust on death. Each trust would only hold a small sum of cash with nothing further to be added during the grandparents’ lifetime.

Their Wills will then leave a gift between the Pilot Trusts and the trust formed on death.

For example, a grandfather has three grandchildren and £300,000 in cash. He forms two Pilot Trusts on separate days now and a further trust in his Will.

The Pilot Trusts operate with only a token sum of money. The need for annual tax returns is dispensed with so, apart from making ten-yearly returns of capital, there are no real administration costs.

On his death, the £300,000 is split between the three trusts, each qualifying for their own nil rate band. Therefore, the overall gift to the grandchildren is protected from ten yearly IHT charges until it exceeds £900,000 in value at today’s rates.

Pilot Trusts are useful vehicles to ensure young beneficiaries are provided for.

People should look at not just their Wills but also consider taking steps now to minimise the IHT burden on their families.