HM Revenue & Customs has provided written confirmation that gifts put into absolute or bare trusts for minors will avoid tax charges by being classified as Potentially Exempt Transfers rather than Chargeable Lifetime Transfers.
There has been concern among the industry that gifts to minors through absolute or bare trusts would be treated as CLTs, and therefore be liable for entry, exit and 10-yearly periodic charges, because the child can only access the trust when they reach 18 and not immediately.
Bare trusts are commonly used to allow gifts to be made for minors who cannot easily hold property in their own name, and a bare trust ensures the funds can be appropriately managed until the child reaches adulthood.
In January, Skandia claimed HMRC had decided gifts into trusts in these circumstances would be CLT, which would mean an immediate Inheritance Tax charge of 20% where the value of the gift exceeds the nil rate band, compared to a PET where there is no upfront IHT charge regardless of the value gifted.
However, HMRC has now written to trade bodies including the Association of British Insurers (ABI) and the Society of Trust and Estate Practitioners (STEP) to confirm it is not intending to change the status of these gifts.
Colin Jelley, head of tax and financial planning at Skandia, says the company is pleased HMRC has "sought further expert advice and chosen a sensible route" for the treatment of absolute trusts created for minors.
He says: “The original proposals would have had far-reaching consequences. We welcome the fact HMRC has engaged with the industry and consulted on this aspect of the Finance Act changes. We hope government continues to consult in formulating tax policy to ensure that the implications of changes are fully thought through.”
Meanwhile, Julie Hutchison, estate planning specialist at Standard Life, says the move is a “very welcome clarification from HMRC”, as advisers and their clients can now use bare or absolute trusts with confidence where minor beneficiaries are being named.
Earlier this year, Standard Life added warnings to its absolute trust documentation highlighting the possibility HMRC might not treat the gift to the trust as a PET where minor beneficiaries were named.
However, Hutchison says: “We will now be revising our literature to remove the warnings which are no longer necessary. We can now return to business as usual with bare or absolute trusts.”
And John Riches, deputy chairman of STEP, says: “HMRC has now dispelled fears that bare trusts for children would be subject to the more convoluted new trust rules and a 6% tax charge. It is clear those who wish to make gifts into bare trusts for children will not be at risk of a 20% tax charge levied on gifts to more complex trusts.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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