The Budget & Inheritance Tax
Even if you had listened very attentively to Mr. Brown’s Budget speech, you would not have heard him breathe a word about the tax changes that he has implemented relating to trusts. The changes were buried deep in the technical documentation. Some might say a rather cowardly act.
The immediate changes mean that Interest in Possession trusts and Accumulation and Maintenance trusts (very widely used by grandparents for their grandchildren) will henceforward suffer inheritance tax in the same way that Discretionary trusts do. What that means briefly is, that if you settle more than the available nil rate band, then inheritance tax is payable on the surplus at the rate of 20%. This is half of the death rate of 40%. In addition, there is a 6% tax charge based on the value of the fund every 10 years, and if in between 10 yearly tax charges, funds are taken out of the trust, then there is an exit charge.
In themselves the changes are not entirely unexpected from a Chancellor that knows absolutely nothing about trusts, and is certain in his own mind that trusts are only ever used by the rich elite to avoid tax. What is singularly unpleasant about this Chancellor’s legislation is that he quite enjoys backdating it. He recently introduced a tax on pre-owned assets and backdated that to 1986. With the new tax on Interest in Possession and Accumulation and Maintenance trusts, the tax charge is immediate for new trusts, and is backdated for all existing trusts after a transition period between now and 2008, during which time the poor tax payer who set up these quite legitimate and sensible trusts have to try to unscramble them or suffer the tax consequences. It is a vindictive way of introducing tax legislation.
Unfortunately, it gets worse and descends into the stupid. It seems again that this Chancellor is one of the few people in the country who clearly believes that it is better to bring a trust to an end and pay the beneficiaries out on their 18th Birthday, rather than wait until they are older, perhaps 25, through University and a little more sensible and worldly wise. Most existing Accumulation and Maintenance trusts, indeed most trusts written in Wills, provide for beneficiaries to inherit at 25, but also provides powers for Trustees to advance capital before that age. Such trusts will now be penalised by this Government under the Budget legislation, unless the beneficiaries are paid in full on his or her 18th Birthday. It is truly difficult to imagine a more ridiculous Budget proviso. What it seems neither the Chancellor nor his acolytes, not his advisers understand is that testators and settlors (those who create trusts) are usually advised to delay the passing of assets to beneficiaries until they are 25, not for any tax reason at all, but so that the recipient beneficiary will at least have a few more years under his or her belt, will hopefully have passed through their tertiary education, and be settled in employment. To incentivise by way of tax break the gifting of capital to beneficiaries on their 18th Birthday beggars belief.
There has been a great deal of Press coverage, and it is anticipated that there will be a great deal of lobbying of the Chancellor and the Treasury from the professional bodies, who are the experts in such matters. It is unlikely that the lobbying will succeed, because it is evident that this Chancellor believes that he knows best, and he and his Treasury team are utterly convinced that it is only the mega rich that will suffer. Lawyers and accountants have estimated that more than 1 million Wills will have to be re-written at a cost of £100 million, and it is expected that the tax increase over the next 3 years from this nonsensical legislation is a total of £30 million.
The Finance Bill still has a way to go, and we will not therefore know how the new legislation will look for 2 or 3 months yet. At the moment there are concerns about existing Wills, and particularly those of the terminally ill, but generally speaking they can be amended within 2 years of death by Deed of Variation, and to date that particular piece of legislation has not been amended.
It is ironic indeed that Accumulation and Maintenance trusts, the target of this Chancellor’s particular venom, were introduced by a Labour Government.
The only notice of the changes to inheritance tax related to some rather esoteric pension provisions, and the Chancellor has also announced increases to the nil rate band for tax purposes going forward. In the present tax year, the first £285,000 is free of tax, next year it rises to £300,000, the year after to £312,000 and then to £325,000. These are not particularly general increases, and what means is that more and more people with relatively modest estates will be dragged into the inheritance tax regime.
April 2006
