Pilot Trusts in Estate Planning: History, Mechanics, and Modern Relevance

The term "pilot trust" refers to a discretionary trust established during a settlor's lifetime, typically with a nominal sum — often as little as £10. The trust deed is fully drafted and operative, but because only a trivial amount has been settled, no significant IHT, CGT, or income tax consequences arise on creation. The trust "waits" as a shell to receive further assets later.

The planning interest in pilot trusts stems from the IHT relevant property regime and, in particular, how the nil-rate band (NRB) is allocated between trusts created at different times.

The Strategy: Multiple NRBs (the "Rysaffe" approach)

Under the IHT relevant property regime, the 10-year anniversary charge on a discretionary trust is calculated by reference to the "settlement nil-rate band" — the NRB available to offset against the trust fund. Where a settlor creates multiple trusts on different days, each trust historically had its own separate NRB allocation (subject to the rules on "related settlements", which aggregate trusts created on the same day by the same settlor).

Before the same-day addition rules took effect, a well-advised settlor could establish a pilot trust on, say, 1 January 2004 with £10, and a second pilot trust on 2 January 2004 with £10. Each trust was a separate settlement with its own NRB. On the settlor's death, assets could be appointed into these separate trusts by will or under powers of appointment, with each trust enjoying its own NRB on each 10-year anniversary. The approach was sometimes called "Rysaffe planning" after the case that confirmed it.

The arithmetic was compelling. If the NRB is £325,000 and a settlor had created five pilot trusts on different days, each trust could shelter up to £325,000 without incurring any periodic charge — a total of £1.625 million shielded from the 10-year charge. For very large estates, the multiplication of NRBs was a significant benefit.

The Finance (No. 2) Act 2015 Curtailment

The principal measure that shut down new pilot trust strategies for multiplying NRBs was the same-day addition rule introduced by Finance (No. 2) Act 2015, which received Royal Assent on 18 November 2015. The rules apply to trusts created on or after 10 December 2014, and to trusts settled before that date where additions are made on or after it. The relevant changes are:

1. Same-day addition rules: where assets of more than £5,000 are added to two or more trusts on the same day (including on the settlor's death), the values added are aggregated for the purpose of calculating the NRB available to each on its periodic and exit charges. This prevents post-death funding of multiple pre-established trusts from producing multiple NRBs on the same "addition day".

2. The "related settlements" concept: settlements made by the same settlor on the same day are treated as related and share a single NRB between them. Pilot trusts established and funded on different days before the rules took effect retain separate NRBs for those historical additions, but the same-day addition rule now neutralises the multiplication for assets added together (typically on death).

(Separately, the earlier Finance Act 2006 reforms to trust taxation removed the favourable treatment of pre-2006 accumulation and maintenance trusts and recast the lifetime IIP regime — changes that made some older trust strategies obsolete, but which did not themselves introduce the same-day addition rule.)

What Pilot Trusts Can Still Achieve

Despite the 2015 same-day addition rules, pilot trusts continue to have limited uses in modern planning:

Separate Administration of Distinct Asset Classes

Establishing separate trusts for different asset classes (for example, one trust for UK property, another for international investments, and a third for business assets) can simplify trust administration and ensure that each set of assets is managed by the most appropriate trustees. Each trust remains a separate settlement with its own accounts and governance.

Protecting Successive Beneficiaries

A pilot trust established to receive a specific legacy from a will — for example, a fund for the benefit of the settlor's grandchildren — ensures that the fund is held under well-drafted trust terms agreed during the settlor's lifetime, rather than relying on the executors to create an appropriate trust post-death. This can provide greater certainty about trustee powers and investment discretion.

Avoiding Intestacy Complications

Where a will includes a bequest to a discretionary trust, the terms of that trust are part of the will and are read aloud at probate. A settlor who values privacy may prefer to establish the trust terms in a separate pilot trust deed (which is not a public document) and direct assets to it via the will.

Using Existing Pre-2014 Structures

For clients who already have pilot trusts that were established and separately funded before the same-day addition rules took effect (and whose trusts have therefore accumulated separate NRBs), preserving those trusts can remain tax-efficient. The 10-year charge on each trust is calculated with reference to its own NRB, although any further additions made on the same day will now be aggregated under the 2015 rules. Trustees and advisers should review the charging history and assess whether the trusts should be maintained, merged, or wound up.

The Same-Day Addition Problem in Practice

The practical difficulty for modern pilot trust strategies is that most of the value flowing into a pilot trust arrives on the settlor's death. Under the same-day addition rules, if the settlor dies and simultaneously (or on the same day) causes assets to pass into two or more trusts, those trusts are treated as related — even if the pilot trusts were established on different days pre-2006.

Under the same-day addition rules, the date of addition is the relevant date, not the date of creation. Two pilot trusts created on different days but both funded on the day of the settlor's death have those same-day additions aggregated when calculating the NRB on their periodic and exit charges. The multiplication strategy is therefore largely neutralised for assets flowing in via death.

However, lifetime additions made on genuinely different days, before death, may remain effective. A settlor who gradually funds multiple trusts during their lifetime (assuming they survive the funding by the required period for PET purposes, and that no same-day additions are made) may still benefit from separate NRBs.

Post-FATCA and CRS Complications

The practical utility of multiple pilot trust structures has been further constrained by the global transparency requirements under FATCA (Foreign Account Tax Compliance Act) and the Common Reporting Standard (CRS).

Each trust is a separate "passive non-financial entity" for CRS/FATCA purposes. Each trust must be reported separately to the financial institutions holding its assets, and each trust's beneficial owners (settlors, trustees, and beneficiaries) must be reported. The administrative burden of maintaining multiple trusts — each with its own bank and investment accounts, TRS registration, annual accounts, and beneficial ownership reporting — has increased substantially.

For many families, the administrative and compliance cost of operating multiple pilot trusts now outweighs the periodic charge saving, particularly where the trust funds are modest and the 10-year charges would in any event be low.

Modern Alternatives

Where the goal is to avoid a single large discretionary trust incurring significant 10-year charges, alternatives include:

• Adding an IPDI layer: an immediate post-death interest (life interest) trust does not attract 10-year charges during the life tenant's lifetime. This may be preferable for preserving assets for a surviving spouse.
• Bare trusts: bare trusts have no periodic charges because they are transparent for IHT purposes. However, they offer no flexibility — the beneficiary has a fixed entitlement.
• Appointments to absolute interests: trustees of existing discretionary trusts can appoint assets to beneficiaries absolutely, triggering an exit charge but removing the assets from future periodic charges.

How Global Investments Can Help

Global Investments advises clients on trust structuring, including reviewing existing pilot trust arrangements to determine whether they remain fit for purpose in the light of the same-day addition rules, ongoing administrative obligations, and the client's current family and financial circumstances.

We also advise on the periodic charge position of existing trusts — modelling the 10-year charge, assessing whether assets should be distributed before the anniversary to reduce the charge, and reviewing the trustee powers to ensure the trust can be administered efficiently.

This guide is for general information only and does not constitute legal or tax advice. Trust taxation is a specialist area and rules have changed significantly over the years. Professional advice tailored to your circumstances is essential. The value of investments and income from them can fall as well as rise.