Trust and inheritance tax

For very many years, Inheritance Tax has been a relative backwater in the tax world, not particularly important in terms of the amount of revenue it raised for the Inland Revenue and a matter for only relatively few individuals.

Since 1997, things have changed somewhat and inheritance tax seems to have become an important tax for the current government. Increases in property prices have brought many more individuals potentially within the scope of the tax and successive changes in legislation have made it increasingly difficult to lessen its burden.

Perhaps against this backdrop, the changes to inheritance tax and trusts being debated as the Finance Bill makes its progress through Parliament are no surprise. The extent of the proposals, however, went far beyond the most pessimistic of budget predictions.

As we stand, it is difficult to be entirely definitive as to how the legislation will work and clarity still seems a long way off. Whilst there have been some welcome Government concessions and it is hoped that there will be more, any degree of certainty will only be advised once the parliamentary process is complete. Even then, based upon previous legislation, it is to be expected that further legislation will be required to “clarify” aspects of the legislation i.e. where the legislation does not work as intended.

The key changes expected to be effected are summarised as follows:

• The normal rule concerning gifts being potentially free from inheritance tax will not apply for transfers to trusts. This will mean that if you transfer more than your nil rate band, currently £285,000, into trust within a seven year period, inheritance tax will be payable on the excess at the rate of 20%. Gifts to individuals remain as they were, but normally the reason for a trust being used in the first place was to try to protect the assets being gifted.
• Most trusts created now will be liable to inheritance tax on a ten-yearly basis with the possibility of tax being charged between these anniversaries. The maximum rate is only 6% but still this can give rise to sizable liabilities.
• Existing trusts are the subject of transitional rules. Particular care is required where there is what is called an accumulation and maintenance trust in place as these have been particularly harshly dealt with.
• Some changes to will trusts are being made. The Government has made a concession so that the feared redrafting of most wills is not now on the cards; however, it is important to keep your will under review, as this may be revisited.

Inheritance Tax is a major issue. Whilst trusts have been used as part of Inheritance Tax planning, they are perhaps better viewed as a method of trying to ensure wealth preservation. Their use for this purpose looks likely to continue as notwithstanding the tax proposals, trusts still remain a valuable tool in passing wealth between generations.

By getting the right advice at the right time, it remains relatively easy to legitimately substantially reduce one’s exposure to Inheritance Tax, not withstanding these pending changes.

For those involved with trusts, now is a good time for review. Whilst the new rules are not as draconian as feared, but with inheritance tax band now at £285,000, a tax 'in-efficient' will could cost you as much as £114,000.