Taxation of trusts can become a very complex matter with huge cost implications for the inexperienced. HMRC have issued a consultation document on 31 May 2013 which contained proposals to simplify the inheritance tax (IHT) charges currently imposed on trusts.
Broadly, four areas were addressed:
• The treatment of accumulated income in trusts
• The alignment of payment and filing dates for trusts
• Simplifying the Inheritance tax 10 year anniversary periodic and exit charges by ignoring previous chargeable lifetime transfers
• Sharing the nil rate band between relevant property trusts created by the same settlor
On 10 December 2013, HMRC issued a summary of the responses received to this consultation. The first two issues were relatively simple and so draft legislation has now been produced for comment with the intention of it being included in the Finance Bill 2014.
As far as the second two issues are concerned, HMRC seems to have noted that, having considered all responses received, that there are genuine concerns with the proposed division of the nil rate band. The two key objections were that the proposed changes would be just as or even more complex than the current regime for advisers and trustees and that applying what was perceived as retrospective legislation to existing arrangements was unfair on the settlors.
It is therefore very encouraging that, as a result, HMRC is prepared to consider alternative ways to achieve simplification of the Inheritance tax calculations, provided that the alternatives are fair and do not result in a loss to the Exchequer.
A further consultation is therefore to take place, publication being expected at or near the Budget 2014. Any legislative changes will be included in the Finance Bill 2015.
Although it is disappointing that finalisation of the new regime will be deferred for another twelve months, it is important that any changes that are introduced are properly thought through, rather than being rushed simply to adhere to an arbitrary deadline.
It seems clear to us that HMRC are approaching the issue with an open mind and it is hoped that the next round of consultation will deliver a result that is simpler for trustees and advisers and yet which preserves the legitimate expectations for existing trusts.
As always this is a very complex area of financial planning and so expert advice is required as there are significant traps for the inexperienced settlor.
Education trusts will replace accumulation and maintenance trusts. As A and M trusts are no longer available what IHT-efficient arrangements are available to those who want to make provision for grandchildren now?
A controlled access trust is designed as an alternative to the old A&M trust and can form part of an estate planning solution. Some may not be familiar with how this type of trust works.
Like an A&M trust, grandparents may decide, as part of an estate planning and school fees exercise, to gift money for the benefit of a grandchild. However, not only are they seeking IHT-efficiency, but they also want to make sure that there is a control over how and when the grandchild can benefit.
At outset, the grandparents will create a bare trust and gift a lump sum to the trustees for them to invest. This is a potentially exempt transfer for IHT purposes and therefore any chargeable gains within the trust are chargeable on the beneficiaries.
The trust is structured so it has two beneficiaries; the named grandchild, who must be under the age of 18, will be entitled to 99% of the benefits and an adult beneficiary (perhaps the 99% beneficiary’s parent) will be entitled to the remaining 1%. Under the rules of the trust, the trustees cannot change the beneficiaries or the split of benefits each beneficiary will receive.
The trustees then invest the lump sum across a series of policies with defined maturity dates and no surrender option. These policies can be structured in such a way as to provide the trustees with periodic lump sums which can be used for expenditure, such as school fees.
As the initial gift is made into a bare trust, there is no IHT payable on entry, whatever the size of the investment, and no 10-year anniversary periodic charges. It is treated as a potentially exempt transfer and is therefore outside of the donor’s estate after seven years. If the original gift is in excess of the nil rate band and death occurs within seven years then taper relief may apply to reduce any IHT payable.
Unlike other bare trust arrangements, the controlled access trust allows the benefits to be held back until after the grandchild’s 18th birthday.
Experienced advice is essential