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:
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.