The recent UK Budget proposals have caused great controversy among trust practitioners for the poten...
The recent UK Budget proposals have caused great controversy among trust practitioners for the potentially harsh treatment they will dish out to trusts. Do they spell the death-knell for insurance-based discounted gift and other lump sum planning trusts? Far from it. If anything, they could become even more popular.
From 22 March 2006, transfers into any flexible trust arrangement will become subject to the 'relevant property' regime that, before then, only applied to discretionary trusts. This will have three main tax consequences:
l An immediate 'entry' tax charge of 20% on lifetime transfers that exceed the IHT Nil Rate Band (NRB).
l A 'periodic' tax charge of a maximum of 6% on the value of trust assets over the IHT NRB once every 10 years.
l An 'exit' charge proportionate to the periodic charge when funds are taken out of a trust between 10-year anniversaries
The only trusts created during an individual's lifetime that will escape this regime will be bare trusts. These are trusts where once the beneficiaries are named, they cannot be changed, and they become absolutely entitled to the trust property at age 18.
A strong lobby is in force at the time of writing to have this age increased to, say, 25, but assuming the Government does not budge, then what does it mean for the future of flexible trusts?
In spite of what the Government thinks, trust planning is rarely about tax planning alone so, on that basis, one can assume that some individuals will still want to pass money down in a responsible manner. Therefore, if you can continue to do this and mitigate the effects of inheritance tax, then trusts may still be an option, and that is where there is still life in insurance-based schemes.
Take loan trusts, for example. On creation of the trust there will be no lifetime IHT as the loan amount will not be considered a transfer of value. Therefore, a settlor can still enjoy flexibility over beneficiaries, and an enjoyment of income without incurring IHT on creation of the trust. In relation to the periodic charge, assuming the loan is £100,000, and 5% pa is repaid, it would be the 40th anniversary before a charge would arise. On an investment of £250,000, it would be the 20th anniversary.
In the case of discounted gift trusts, the settlor's carved out entitlements may reduce the value of gifts to below the NRB. In all cases, the fund value for the purposes of the periodic charge may be relatively low. The table below shows how much an individual and joint settlors could invest before a lifetime IHT charge would arise.
Age of Maximum Gift £ Joint Settlors Maximum Gift
Male Settlor Without Lifetime IHT Age Without Lifetime IHT £
50 1,450,000 50 4,740,000
55 1,120,000 55 3,540,000
60 878,000 60 2,675,000
65 700,000 65 2,050,000
70 575,000 70 1,598,000
75 487,000 75 1,275,000
80 424,000 80 1,050,000
These figures certainly make discounted gift trusts a viable option for many under the new regime. Furthermore, it has also been confirmed that the trust fund value will no longer form part of the beneficiaries' estates. This could result in the overall IHT liability being lower in the long run, when considered over two or more generations, especially where there are beneficiaries whose own wealth exceeds the nil rate band.
Finally, it is also possible to avoid the new rules completely by slightly amending the trust wordings. Although it would not be possible to amend beneficial entitlements after the trust has been created. This may be the way forward for those who have larger amounts of capital to invest.
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An added tier of asset management can of course deliver additional benefits for certain investors, writes Graham Bentley - just be sure you can justify it to the regulator and, especially, the client