Inheriting a problem

The ‘alignment’ of the inheritance tax treatment of trusts could have
ramifications for millions.

There would appear to be circumstances in which the spouse exemption might
not be available on death if Budget note 25 is interpreted strictly. This could
affect all those couples who have drafted mirror image wills leaving the nil
rate band to a discretionary trust and the balance on trust for the survivor.

Depending on the wording of the second trust, the spouse exemption may not be
available, so the surviving spouse could be forced to sell the family home to
pay the IHT bill.

The chancellor does not seem to accept there are good social reasons for the
use of trusts. Firstly to protect against assets leaving the family through
divorce or spendthrift beneficiaries. Or simply to pass family businesses down
the generations.

It seems as though trusts are only acceptable provided beneficiaries can have
their capital when they turn 18. This is seven years younger than the age at
which beneficiaries of accumulation and maintenance trusts had to receive their
share of income under the ‘previous’ rules.

There’s a huge difference in maturity between an 18-year-old and a
25-year-old and it does not make sense to be forced to give substantial values
to beneficiaries while they are relatively young.

The proposals seek to bring interest in possession, life interest,
accumulation and maintenance trusts into line with discretionary trusts and
charge them to IHT every 10 years or when capital leaves the trust.

There are few exceptions from this regime, which is due to apply to new
trusts, existing accumulation and maintenance trusts from 6 April 2008 and
existing interest in possession trusts when there is a change in life tenant
from 6 April 2008.

This legislation is expected to affect trusts, will planning and may also
affect some financial planning products such as discounted gift schemes and life
assurance policies.

The press release was a complete surprise because although there has been a
consultation on the modernisation, changes to IHT had never been mentioned
during that consultation.

Perhaps this legislation should be deferred until there has been a proper
consultation process and time to assess the possible ramifications.

Ian Miles is client service director at Grant Thornton

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