Aston Bond Law Firm

Newsletters

Latest on Inheritance Tax

The world of trusts has recently been turned upside down, due to the radical announcements made by the Chancellor in March 2006. Although Gordon Brown barely mentioned trusts in his speech, the extent of the punitive new tax regimes was subsequently revealed to be vast, impacting all trusts except Bereaved Minor Trusts, Trusts for the benefit of the disabled and Immediate Post Death Interest Trusts.

Unfortunately, contrary to the claims of the Chancellor, the impact was not to be felt by only a wealthy few, but millions. Professionals began to protest and it seemed that the Chancellor only then began to realise the huge consequences his proposed actions would bring about.

Perhaps this is why he very quietly retreated from these proposals in June. Although the new tax regime will still be punitive, it will not go to the same extremes that were originally suggested.

With the increased use of retrospective laws, and the Chancellor casually going back on his word, the professionals are in legal limbo until the new Finance Act is published in July 2006, which should cement the future treatment of trusts. This leaves many professionals in a quandary with regards to the advice that they should be giving to their clients in the meantime.

From the current perspective, taking into account both the original proposals and the recent climb-down, the trust position as it stands to date is as follows:

Every person in England is entitled to a tax allowance to pass free of tax on death. Currently this is 285,000 and is set to rise to 325,000 by tax year 2009-2010. When this tax allowance passes into a trust, it is not taxable. However, anything over this amount may well become subject to tax, depending on the conditions of the trust.

If the trust has been set up for the donor's own children, specifying that the children should take the capital at the age of 18, these trusts will not be taxable. If the age limit is extended to, for example 25, this retention of control is chargeable at 4.2% of the value in excess of the tax allowance held in the trust for the years after the children have attained the age of 18 (not from when the trust starts, at 6% as was previously proposed).

All other trusts, including those set up for grandchildren, now face a 20% charge on the value of all assets placed into trust worth more than the tax allowance, a 6% ongoing charge levied every ten years on the assets held in trust and further charges when assets are put into or taken out of the trust. It is unclear whether these tax charges will start at the time that the trusts are set up, or whether, as with trusts for children, these will only begin when the beneficiaries reach the age of 18. The amount of tax charged every ten years is also drafted so openly that this is easily able to be increased in the future and in fact trust specialists predict that this is more than likely to occur.

Although life policies set up before 22nd March 2006 should be exempt from the new tax regime, when assets are added to the trust or terms of the trust changed, this will then be treated as a new trust forming and this new trust would then be subject to the new tax regime charges, as detailed above.

It is perhaps not surprising then, to learn that the government expects to collect 3.6 billion in inheritance tax this year. Together with the new punitive tax scheme, the fact that the tax allowance has not been increased to correspond with the increase in house prices, has meant that a tax that once only affected the wealthier section of the society, now affects more than two out of three property owners.

It appears that the government are encouraging young people to inherit large sums of money at an increasingly immature age, free to be spent on fast cars and expensive holidays. If the donor wishes to retain any control over the assets, he must pay for this privilege.

And so we continue to wait, until the end of July, before we can advise clients fully on the best actions for them to take with regards to trusts and tax avoidance.