The Budget And Your Will
It is now some months since Mr. Brown’s last Budget was added to the Statute book and it is now the Finance Act 2006. It is hardly surprising that many people are confused as to the effects on their Wills particularly of the Finance Act 2006, in light of the publicity surrounding trusts. The purpose of this article is to outline what the effects of the Finance Act is on existing Wills, what does not need to be changed or worried out, and what needs to be reviewed.
As a pre-cursor to that, it is worth putting the Finance Act 2006 into some kind of perspective. The legislation was never intended to raise a great deal of money, about £10 million a year. Under the new Act all trusts will be taxed in the way that discretionary trusts have been taxed for some time. New trusts enter the new tax regime at once, and existing trusts have until April 2008.
Simply stated, all trusts will be paying income tax at 40% and capital gains tax at 40%. As for inheritance tax, the settlors may pay 20% lifetime tax, and the Trustees could be liable for a 10 yearly charge of 6%. If during the course of any 10 yearly period capital is withdrawn, then there would be an exit charge.
Looking at Wills therefore what is the impact? To the extent that a Will leaves anything to the surviving spouse, the situation remains as it was before the Finance Act. There is no change, although Mr. Brown wanted to make a change. Similarly, the nil rate band discretionary trust is as valid now as it was before, and has not been affected at all by the legislation. If the Will leaves assets to beneficiaries absolutely rather than in trust, again the Finance Act has no impact.
The real change applies where trusts other than for a surviving spouse are created. The exception to this are trusts for the disable, which will not fall into the new legislation.
If the children of the testator are minors at the date of death then a trust called a ‘Bereaved Minors Trust’ occurs until the children with their majority at age 18. Again, there is no change and there is no additional tax burden. The burden falls if those trusts continue beyond the age of 18. Most testators prefer to leave assets in their Will to their children at age 25, thinking that by that time they will have been full educated and matured. In future, there will be a potential tax penalty for the 7 year period, this as mentioned above will be at the rate of 0.6% per annum, and so if there is a trust that expires at age 25, the tax charge will be 4.2%.
It is important to note that the Bereaved Minors Trust only applies to the testator’s children. It will not apply to the testator’s grandchildren, nor will it apply to any other infant beneficiary under the testator’s Will. Those would fall squarely into the new tax regime.
As mentioned above, the main purpose of this piece is to discuss the effect of the new Finance Act on Wills. I believe that for most testators the damage will be very limited indeed, and my experience to date, is that clients would far rather pay a little additional tax, then have trust funds released to their children at age 18. It is unfortunate that the penalty extends to grandchildren and other relatives, but potentially the damage is limited.
It is worth noting that the Trustees have certain powers that could affect the tax. Firstly, if a testator leaves assets to children at 18, and if those children are minors at the date of death, then the Trustees may effect a settled advancement, thus creating additional trusts, if in the Trustees opinion the beneficiary at 18 would not fit to manage his or her inheritance. On the other hand if you specified in the Will the age of 25, equally the Trustees would have power under the 1925 Trustee Act to advance up to half of the capital to the beneficiary between the ages of 18 and 25, and indeed most modern Wills extend that to the whole of the Trust Fund, so that the trust can be brought to an end before aged 25.
To conclude, I think that it is not worth panicking over the Budget changes to tax. It is always worth reviewing Wills in any event on a regular basis, perhaps every couple of years, and those that do not make Wills simply surrender the chance to save tax and protect both their assets and their loved ones.
