Vast Changes to Inheritance Tax Planning Using Trusts
HM Revenue & Customs may encourage wealthy families to give their assets directly to children and grandchildren by proposing that all trusts settled by an individual are treated as one trust for the 10 year anniversary charge on the trust. At present trusts set up on different days by the same settlor have their own allowance for the income tax charge.
In addition they are proposing that an individual can only make a gift up to a maximum of the Nil rate band currently £325,000 into trust over a lifetime whereas currently this can be done every 7 years free of immediate tax.
Any amounts above this threshold that are put into trusts are subject to an “entry charge” at a rate of 20 per cent. A further “periodic charge” of 6 per cent is levied on each 10-yearly anniversary of the assets entry into the trust, and an “exit charge” is payable when assets are removed.
HMRC claims the changes are necessary to simplify what is a complex set of rules, but what may have started out as an attempt at simplification of trust inheritance tax has turned out to be yet another tax raising measure.
There would remain no limit on the number of trusts that anyone can set up, but individuals would have a single allowance, equivalent to the nil-rate inheritance tax band, available to allocate across trusts
The new proposed limits by HMRC will potentially lead to an increase of financial gifts to younger generations and also the use of more risky investment products which benefit from business property relief.
In contrast to trusts, however, the settlors ( person making the gift) control over assets is immediately lost once a gift is made to a beneficiary raising concerns that younger beneficiaries may fritter away an inheritance which they may not yet be responsible enough to manage.
The problem is that trusts are also used for control reasons – not just tax – to protect against the risks of children getting a lot of money at a young and impressionable age.
In addition gifts into discretionary trust can protect the assets gifted over the long term in the event the children or grandchildren get divorced in the future. However most married couples who can afford it and take action early enough would still be able to gift £325,000 each – a total of £650,000 which can be protected which is probably more than most people can afford.
Despite the changes trust planning is still a worthwhile exercise but should only be done under expert guidance.