More On The Budget
Last month I indulged myself in sounding off against Mr. Brown and his Budget, the unpleasantness of back dating tax legislation and the absurdity of seeming to prefer to pay large sums of capital to 18 year olds rather than 25 year olds. It is my fervent hope that my profession and the accountancy profession with others, will manage to persuade the Chancellor that he has got this wrong.
Whilst it may be possible to change his mind on the question of 18 verses 25, there is no doubt that the new tax regime will continue to apply to Interest In Possession Trusts and Accumulation and Maintenance Trusts, and this means that they will be taxed in the same way as Discretionary Trusts. I have had any number of calls from clients asking me to review Wills, wondering if trusts should be wound up, and generally expressing concern at this new turn of events. My advice has been to wait and see, because it will be a month or so yet before the Finance Act is published, and things may change.
Perhaps one way to review this legislation is as an opportunity. Hitherto clients have moved more towards Interest In Possession and Accumulation and Maintenance Trusts, and away from Discretionary Trusts, because of the tax treatment of a Discretionary Trust. This has changed, and henceforward all trusts will be taxed in the same way. It is important too to see this tax in its true context. The tax chargeable will be at a rate of 6% each 10 years, and will be charged on the excess over and above the nil rate band for inheritance tax purposes. However unpleasant the legislation I suggest that for the vast majority of trusts the tax payable will be manageable, and certainly any well run trust fund should continue to grow in real terms despite the tax penalty.
The question which is begged, is as to whether clients should move back towards Discretionary Trusts, and away from Interest In Possession trusts particularly. The reason for this may be safety and flexibility. With an Interest In Possession Trust a person, the life tenant enjoys an interest for life, which is an entitlement to the income arising from the trust for his or her life. This in itself causes potential problems. Firstly, it is an asset which can be sold for a capital sum. Secondly it is an asset which can be attacked on divorce or bankruptcy, and thirdly on the death of the life tenant the capital fund in which he or she enjoy a life interest is added to his or her estate for inheritance tax purposes. The beauty of a Discretionary Trust has always been that it is entirely flexible, it is capable of protecting assets and capable of protecting beneficiaries. Contrast it with the Interest In Possession Trust. In a Discretionary Trust there is no one beneficiary but rather a list of or class of potential beneficiaries. No beneficiary is entitled to benefit either from income or capital, and does so only at the discretion of the Trustees. Thus the potential beneficiaries interest in the trust is of no value, cannot be sold, cannot be attacked on divorce or bankruptcy, and does not form part of that person’s estate on his or her death for inheritance tax purposes.
It also means that the settlor or the testator, who has created the trust either during his or her lifetime or on death, can leave behind a very flexible letter of wishes for his or her Trustees. It is a fact that a Trustee’s discretion may not be fettered by such letter of wishes, but such letters are welcomed by Trustees, and acted upon more often than not.
Thus, it may be that inadvertently the Chancellor has created a new opportunity for flexibility and security, albeit at a price, a 10 yearly charge to inheritance tax. However, now that the 10 yearly charge applies both to Interest In Possession trusts and Accumulation and Maintenance trusts perhaps the Discretionary Trusts turn has come again.
