Geoffrey Shindler of Lane Smith & Shindler LLP discusses the developments surrounding IHT since the Finance Act of 2006
The basis behind trusts and tax planning is the flexibility of English law, which enables the legal estate to be vested in the names of trustees but the beneficial interest to be held by them for others. It is this division of ownership that sets the scene for trust planning and sets apart our legal system from that of continental Europe.
We all know that there were dramatic and draconian provisions in the Finance Act 2006, which seemed to have as its objective the destruction of the concept of the trust. The legislation was a disgrace to the English legal system. It was unheralded, ill-thought-out, badly conceived and poorly drafted. But we have to make the best of what we have left.
From 22 March 2006 every gift into a trust is a chargeable transaction for IHT purposes - not so a gift from one individual to another, which remains a potentially exempt transfer (PET). So much for this Government's view that there ought to be a level playing field and fairness in the tax structure.
The new legislation has led to a new focus on advice. We are no longer able to make very large gifts into trusts when we are in our 70s because, if the value given exceeds the nil-rate band, there will be a 20% IHT charge. So we have to make smaller gifts, starting earlier and over a longer period of time. Thus, it is now standard advice to high net worth taxpayers to give away non-income-producing assets into a discretionary trust for their family up to the value of the nil-rate band. The nil-rate band is available to both husbands and wives, so you can give away £600,000 every seven years if this is what suits you.
One of the biggest changes after 2006 lies in the removal of the accumulation and maintenance settlement. What is left is the ability of a parent (not a grandparent) to make a settlement by will, the capital of which will vest in children at the age of no later than 25. If this is done then there will be a charge to inheritance tax when the capital vests but the maximum charge to IHT will be 4.2%, or 0.6% for each year when the child exceeds 18 years of age up to attaining the age of 25. A sort of 18-25 club. It is not much of a tax planning vehicle but I suppose it is better than nothing.
Another little used exemption prior to March 2006 was what is known as the regular gift out of surplus income. That gift, when made, will be exempt. It will not be a PET and it will not be chargeable - it will fall out of your IHT net the moment the cheque clears. So, if you are in fortunate position of having a large amount of surplus income and foresee this happening over a regular period of years, why not create a trust that will enable you to put in that surplus income on a regular and annual basis? The trust itself can be discretionary but there will be no IHT when the trust is established.
What about the bare trust? We have heard a lot about this but it is not really a trust at all. If you look at it as a nominee arrangement you have the best way of seeing what it is. The crucial point is that the beneficiary of a bare trust can demand the assets at age 18. That seems to be this Government's approach to life, namely that children are mature at 18 and can manage their own financial affairs at that time. I suspect that every adviser in the country, and almost every parent in the country, except those in the Cabinet, know that this is a fallacy of remarkable proportions. Apparently, the argument is that you can join the armed forces and die for your country at age 18 so why should you not be able to manage your personal financial affairs at that date? Choose your own answer to that particular piece of illogic.
And what about nil-rate band trusts in wills following the pre-Budget report of October 2007? I want to see the relief claimed at the earliest possible opportunity and that is via the nil-rate band trust. If you think that a politician thought it was in his interests to remove the smoke and mirrors relief given in October 2007, would he not do so without compunction?
There is still room for tax planning through trusts but you now have to be even more careful than you were before in order to keep yourself on the right side of the taxpaying line.
Joined as head of strategy, multi asset, in June
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