Skandia is urging the government to reconsider what it describes as a "stealth tax on children" following confirmation gifts to minors through absolute trusts will be liable for tax charges.
Changes to the ways trusts are taxed was announced in last year’s Budget Statement in March, and was designed to limit Inheritance Tax (IHT) avoidance, however Skandia says HM Revenue & Customs (HMRC) has now confirmed gifts in an absolute trust for children under the age of 18 will be classed as chargeable lifetime transfers (CLTs) and not potentially exempt transfers (PETs).
HMRC has suggested this is because a child cannot access the trust until they are 18, rather than immediately, however Skandia points out this means trusts for minors will be penalised by being liable for entry, exit and 10-yearly periodic charges, while gifts to adult children in a similar trust will be classed as a PET.
And because parents and grandparents are unlikely to want to gift money to minors outside of a trust as children will not be able to manage money appropriately, Skandia says this decision has “far-reaching consequences”.
It argues the decision to treat gifts into the same type of trust differently based on the recipient's age will result in a less favourable tax position for the gift to the minor, while it points out the differences in trust law between Scotland and England could also cause some difficulties.
Under English law a minor can access an absolute trust at 18, but in Scotland they can access it at 16, and Skandia points out if a grandparent made a gift to two children aged 17, one of which lived in Scotland and one In England, each trust would be taxed differently as the English trust would be classed as a CLT while the Scottish trust would be a PET.
Colin Jelley, head of tax and financial planning at Skandia, points out the rule is not just a life insurance issue as it could also affect other financial arrangements such as mutual funds and bank accounts, because it affects anyone who is saving money for children and has set up a trust to protect them.
He adds: “The situation we have must surely be an unintended consequence of the changes introduced last year. I would be astonished if the government’s intended policy was to introduce a tax charge on almost all gifts being made to children. We are urging the government to take another look at the effects of this and consider the damage it could do.”
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