Glossary · UK
What is Pilot Trust?
A trust set up with a small nominal sum, often before other larger trusts or a death, historically used to multiply the number of nil-rate bands available for periodic Inheritance Tax charges, now largely neutralised by anti-avoidance rules.
Full Definition
A pilot trust is a trust established with only a small nominal amount of money -- sometimes as little as 10 pounds -- often set up in advance of a larger trust being created later, or in advance of an anticipated death (for example, by a life insurance policy written into trust, or as part of a will's planned trust structure), with the intention of adding further, more substantial assets to it at a later date. Historically, individuals used multiple separate pilot trusts, set up on different days with gaps between them, as a way to give each trust its own separate nil-rate band for Inheritance Tax periodic and exit charge purposes, since the relevant property regime's ten-year periodic charges are calculated with reference to the settlor's available nil-rate band at the time each trust was set up. By spreading assets across several pilot trusts rather than concentrating them in one, a settlor could, in principle, ensure each trust's periodic charge calculation benefited from its own full nil-rate band, rather than one trust's nil-rate band being reduced because of chargeable transfers into other trusts made on the same day. HMRC introduced specific anti-avoidance rules, most significantly the "same day additions" rules effective from 10 December 2014, which require related settlements made by the same settlor on the same day (which includes many life insurance trust and will trust structures) to be treated, broadly, as sharing a single nil-rate band for periodic and exit charge calculations, rather than each getting its own full allowance. As a result of these rules, the historic tax planning benefit of setting up multiple pilot trusts on different days specifically to multiply available nil-rate bands has been substantially reduced, though pilot trusts continue to be used for legitimate practical reasons unrelated to nil-rate band multiplication -- for example, to have a trust structure already in existence and ready to receive life insurance proceeds immediately on death, avoiding delay, or as part of a staged estate planning strategy set out in a will. Anyone considering a pilot trust structure, particularly one involving multiple trusts, should take specialist advice to confirm the same day additions rules and other anti-avoidance provisions do not undermine the intended tax outcome.