In its latest consultation document of 6 June 2014, the
Government proposed some radical amendments to the Inheritance Tax (IHT) system, which will affect anyone
planning to set up new trusts or add to existing ones after 6 June 2014.
A trust has the potential to pay IHT periodically over its
‘lifetime’ (which can be up to 125 years), typically on each ten year anniversary
since creation (‘periodic charge’) and on capital distributions from the trust
(‘exit charge’). However, under the old
rules, broadly speaking, as long as the trust’s assets never exceeded the then
IHT nil rate band (NRB) (currently
£325,000) at the material time, the trust would never pay any IHT throughout
its whole life. Even if there were
periodic or exit charges to pay, these were often less than the 6% maximum
rate. Compare this to the 40% charge on
an individual’s death and suddenly putting ‘surplus to requirements’ assets
into trust for future generations looks like a good deal.
If the Government’s current proposals are enacted, this
basic planning will be disrupted but, I would argue, not fundamentally so. The ability to keep putting assets into trust
every seven years will remain, but all trusts created in a taxpayer’s lifetime
will have to share an NRB (to be called the taxpayer’s ‘settlement nil rate
band’ (SNRB)) when it comes to
calculating periodic and exit charges.
This means that if a taxpayer sets up several trusts in his or her lifetime
which together contain more than an NRB’s worth of assets, there will be some
periodic and exit charges to pay over the trusts’ lifetimes whereas, under the
current regime, there might have been none.
The proposals also create an election system, which
envisages placing taxpayers under a statutory requirement to allocate their
SNRB across their trusts on a percentage basis.
Failure to elect will oblige the trustees to pay periodic charges at the
6% maximum rate.
Is this the death knell for trusts, as some reports would
have you believe? Rest assured, it is no
such thing. Here are some of my
favourite ‘alarmist’ statements taken from the press coverage over the past
week:
·
The
changes will result in parents and grandparents ‘giving up’ on trusts.
The complete opposite, in my view. Well advised parents and
grandparents will now ensure that, even if they don’t make a single trust in their
lifetime, they do now put a trust in their Wills on death. Otherwise
families will pay more IHT over the generations if they allow a grandparent’s
or parent’s SNRB to be lost by not capturing it via a trust in their Will.
Therefore expect trusts in Wills to enjoy a resurgence in popularity and
the management of a taxpayer’s SNRB to become a major planning issue requiring
specialist tax advice.
·
People
will no longer set up multiple trusts because of these Inheritance Tax changes.
Unlikely. Families need to use trusts for non tax reasons and sometimes using more than one is
necessary to preserve some sense of autonomy between different branches of the
family. For example, children are more
inclined to accept the benefits of having their inheritance retained in trust
after a parent’s death if they don’t have to ‘share’ that trust with their
other siblings! These proposals won’t
change that.
·
The
changes mean that you can only put £325,000 into trust in your lifetime free of
IHT.
This is wrong! People can put
unlimited amounts into trust and will not have to pay an immediate IHT ‘entry
charge’ if they plan correctly. However,
if more than £325,000 is retained in trust, sooner or later in the life of the
trust there will now be some IHT to pay in the form of periodic or exit charges.
Trusts still
represent the best way for families to protect family wealth for the benefit of
successive generations and to protect wealth for the benefit of vulnerable
family members, including disabled children (of any age) and anyone who lacks
the capacity or maturity to manage family wealth.
The proposals are just that at this stage, so further
revisions are possible. Expect draft
legislation around the time of the Autumn Statement later on this year.
