One in 10 adults could be affected by proposed changes to the inheritance tax (IHT) treatment of interest in possession (IIP) trusts announced in the Budget, claims Skandia.
It says the changes, which also affect accumulation and maintenance trusts, mean around 4.5 million insurance policy trusts will need reviewing and probably updating, along with millions of wills.
With no consultation on the proposed changes, Skandia says there could be many unintended consequences, for example forcing assets to be sold to pay tax on first death will be a disaster for ordinary families, and forcing beneficiaries to inherit at age 18, when financially inexperienced, could be a disaster for social policy.
Colin Jelley, head of tax and financial planning at Skandia, and chairman of the product tax panel at the Association of British Insurers (ABI), says this year’s Budget was billed as being ‘tax neutral’, but the reality is it contained the most significant changes to IHT since it was introduced in 1986.
He points out the exact details of the changes will be announced in the Finance Bill on 7 April and it is imperative the Treasury listens to the views of industry bodies which have practical experience of the consequences.
Jelley says: “There seem to be too many inconsistencies with the current proposals that need to be clarified in the Finance Bill. For example, why is an outright gift to a spouse treated as exempt whereas the same gift made via certain types of trust is not?”
He suggests the proposals have not been properly thought through and warns there could be too many unintended consequences, as forcing beneficiaries to get outright entitlement at age 18 simply fuels the conspicuous expenditure of teenage alpha males.
As a result, Jelley claims a consultation period is needed to help the Government avoid these pitfalls, but in the meantime, Skandia is regularly updating a free guide for advisers entitled ‘Budget 2006: trust measures’, which explains the current understanding of the Budget notices, and is available on its website.
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