David Ingram, partner at threesixty, explains how recent announcements and amendments will affect trusts and inheritance tax planning
There is no doubt that, as a result of the Budget Day (22 March 2006) announcements around the inheritance tax (IHT) treatment of trusts, lump sum IHT planning using trusts has become much more complex. The various amendments to the Finance Bill tabled in early June have provided more clarity but have not removed any complexities.
Clients, of course, still want advice on IHT planning; indeed the publicity around the Budget seems to have generated increased awareness of the need for planning. Sadly, clients always seem to want simple and straightforward advice and four page essays on the calculation of periodic and exit charges just don't seem to answer that need.
Firstly, there are trust-based solutions that are unaffected by the Budget changes. 'Absolute' or 'Bare' trusts are not affected by the Budget changes, they are effectively the same as a gift to an individual so that they benefit from potentially exempt transfer (PET) treatment and are exempt from both periodic and exit charges.
Some providers have already launched loan, gift and loan and even discounted gift schemes linked to absolute trusts to take advantage of this.
The absolute trust route is effective for IHT purposes post-Budget but it is important to note that any beneficiary over age 18can normally demand that their share of any trust assets be paid to them at any time. Some providers have trust wordings and policy conditions that effectively reduce the risk of this happening and it is best to 'shop around' and ask providers just how they have dealt with this issue.
Why do we need trusts?
Enough about trusts! Do we really need to use them?
It isn't necessary to use a trust to create a loan or gift and loan agreement; clients could just gift and/or lend money to their children for them to invest. 'Children' in the context of lump sum IHT planning are invariably adults, since only clients over 60 tend to undertake lump sum IHT planning, and so can make these investment decisions.
The big advantage of trusts, of course, is the degree of control that a wealthowner can retain over gifted assets by appointing them as trustee.
So are there lump sum planning routes available that allow the wealthowner to retain control of their assets without a trust but with IHT benefits?
There are indeed and they are becoming increasingly popular. A range of schemes has been developed that allow clients to benefit from business property relief. These schemes allow clients to gain an effective IHT exemption without making any gifts and to benefit from the income generated from the assets without any risk of a pre-owned asset tax (POAT) charge.
Obviously there is no need to use a packaged scheme in order to obtain these benefits; a client could simply purchase some Aim or OFEX shares. The use of a packaged scheme, however, brings additional benefits by reducing risk in two ways: by providing a greater spread of investments and by removing the risk of the client purchasing shares in a company so successful it obtains a full stock exchange listing - thus removing IHT relief (unless the client owns more than 50% of the company). Packaged schemes also often provide two-year term assurance cover equal to 40% of the investment to cover the IHT liability in the event of the client's death within the qualifying period (above).
There are numerous Aim-based schemes, among the most well-known being that offered by Octopus Asset Management.
Where particularly risk-averse clients are concerned it is even possible to invest in schemes based around residential property development companies such as those developed by Close Wealth Management.
During the client's lifetime they retain the investment, drawing dividends as appropriate. On death the investment passes under their will with no IHT due to the 100% relief.
Too good to be true? No, at least not under current legislation. The problem is that there is no guarantee business relief will be available in its current form or at its current rate when the client dies. At least the changes to trust-based schemes were not, by and large, retrospective; a change to business relief between the date of investment and the date of death need not be retrospective in order to render the investment ineffective for IHT purposes.
Staying invested could prove lucrative
Consider lasting powers of attorney
Less environment, more governance threatens to undermine firms' green credentials
Evidence your compliance