“Reports of my death have been greatly exaggerated”

Author: Helena Luckhurst

This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

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.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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