An unprecedented alliance of professional bodies has issued a statement calling for Budget changes to the taxation of trusts to be postponed until proper consultation has taken place. The alliance of lawyers, accountants and other professionals highlights that millions of people will face problems because legislation is being rushed through without proper consideration of the effects. The proposals may cause hardship by bringing in new tax charges for spouses where assets are left in almost any sort of trust arrangement, including trusts created automatically when people die without leaving a will. They will create an unfair anomaly between wills that use trusts and those that don’t. They will put assets in the hands of people too young or too vulnerable to manage them sensibly. And they could affect life insurance policies.
John Riches, Chair of the Technical Committee of STEP (the Society of Trust and Estate Practitioners) comments: "We are waiting to see the fine print of the Finance Bill on Friday. We are very concerned that these changes don’t just affect people who make wills. If you die without making a will and you have children, the statutory rules on intestacy can mean that a trust is automatically set up for your family. This means if someone dies leaving a house in their own name worth £500,000, their family may now have an extra tax bill of £36,000 compared with nil before Budget day."
Emma Chamberlain of the Chartered Institute of Taxation (CIOT) adds: "It is perfectly right and proper that the Government acts to stop unacceptable tax avoidance through use of trusts. However all the professional bodies hope that HMRC and the Government will listen to our representations and modify the proposals to ensure that spouses and civil partners remain exempt and that young and vulnerable people can continue to be protected through trusts without suffering a financial penalty."
Kevin Martin, Law Society President, says: "This measure will affect millions of ordinary people and not just the very wealthy that the Government claims to be targeting. This was completely unexpected and there was no period of consultation for the impact to be properly assessed. These hasty measures need to be reassessed by the Government. It could be said that the proposals will amount to retrospective legislation, which is, in principle wrong."
Trusts involving spouses are common where, for example, a husband dies young and wants to ensure that his wife is financially secure but that the capital eventually passes to his own children rather than any future husband his wife may marry. Trusts for the spouse are also used a great deal on second marriages to protect the capital for the children of a first marriage. Now these sensible arrangements will attract a tax charge.
It is also anomalous that wills involving trusts for the spouse should attract more tax than wills without trusts. If no trust is made, no inheritance tax is due until the death of both spouses in a marriage (or partners in a civil partnership). But under the new proposals, if a trust is made, inheritance tax could now be due both after the death of the first spouse and again after the death of the second.
Problems may also arise where trusts are set up for the surviving spouse on divorce or where existing trusts are varied on divorce. In these circumstances there could be an upfront 20 per cent inheritance tax charge.
The Government further intends to tax at 20 per cent all future lifetime gifts made into trusts for a spouse’s children or grandchildren unless the children are disabled or take the assets outright at 18. All gifts to children in wills and many existing trusts holding assets for children will be taxed unfavourably in this way. This will mean that trusts which prevent children from taking assets until they are considered to be financially responsible, typically at age 25, suffer a financial penalty.
Trusts are used, too, by parents who wish to protect vulnerable young adults, such as drug addicts, from themselves by keeping control of how their money is spent. Now such persons will face a 20 per cent tax charge on gifts into trust.
The proposals could also affect life policies which are written in trust where the life assured is in ill-health or has died just before the ten-year anniversary of a trust.
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Notes to Editors
1. The professional bodies who are calling for a delay are the Low Incomes Tax Reform Group (LITRG), the Law Society of England & Wales, the Law Society of Scotland, the Society of Trust and Estate Practitioners (STEP), the Chartered Institute of Taxation (CIOT), the Institute of Chartered Accountants in England & Wales (ICAEW), the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants (ACCA) and the Association of Private Client Investment Managers (APCIMS).
2. The number of families affected by these changes could run into the millions. In a survey on 31 March, more than 450 members of the Society of Trusts and Estate Planners (STEP), just over 11 per cent of the membership, said the wills of over 830,000 clients would need to be re-written. Given that nearly 90 per cent of STEP members did not reply and that there are solicitors and will writers who are not members of STEP, this figure is likely to be the tip of the iceberg.
3. The insurance company Skandia estimates 4.5 million policies are affected.
4. The changes were introduced in the Budget without prior warning or consultation. They were not raised during the two years of discussions that HM Revenue & Customs have been having with the professions on the taxation of trusts.
5. The changes proposed by HM Revenue and Customs (HMRC) in Budget Note 25 can be found at www.hm-treasury.gov.uk/media/602/CF/bud06_budgetnotes030406.pdf.
6. To read the response from the professional bodies click here.