Tax changes impact on will and trusts
May 2006
Many thousands of people may need to revisit their wills and inheritance tax plans following the surprise tax changes announced in this year’s Budget. The changes introduce an inheritance tax charge on assets gifted into most kinds of trust, affecting both new gifts and many existing arrangements. For most people the impact is likely to be very little, but if you have a large estate, the consequences could turn out to be considerable.
The new rules only affect trusts – the legal devices that allow you to make gifts for the benefit of your children or other beneficiaries, with the assets held by the trustees you choose.
In effect, the Finance Bill 2006 rewrites the inheritance tax rules for the two most popular forms of trusts used in estate and other financial planning arrangements: flexible trusts (which are a form of ‘interest in possession’ trusts) and accumulation and maintenance trusts.
The effect of the proposed new rules is that almost all new gifts into trusts could suffer inheritance tax at 20% of their value to the extent that they exceed the donor’s unused nil rate band – which could be up to £285,000 this year. Then there will be a tax charge of up to 6% of the trust’s value every ten years, usually to the extent that assets in trust are worth more than the nil rate band. And there will be a proportionate charge when assets leave the trust.
Most trusts are below the nil rate band or not much above it, so there will be little or no ten yearly or proportionate tax charges. But the extra layer of complexity and the long-term impact on larger trusts could be significant.
Right now there is considerable uncertainty about the full effect of the draft legislation on new and existing trusts.
There could still be some changes in response to the widespread criticism which the measure has provoked. Remember that the Financial Services Authority does not regulate will writing and taxation and trust advice. But even now, three things are clear:
The government is adopting an ever harder line on inheritance tax, which is expected to raise £3.6bn in 2006/07. The adjustments made to the nil rate band – which do little more than counter inflation – suggest that the subject of reform has been kicked into the long grass until after the next election.
If you have any existing inheritance tax planning in place (including your will), it ought to be reviewed as soon as possible once the dust has settled. It may turn out that nothing needs to be altered, but only a thorough review will reveal the right course of action.
If your estate is worth, or is likely to become worth, more than the nil rate band, and you have not undertaken any inheritance tax planning, you need to act. Once again, the timing for review will depend on the finalisation of the legislation.
Despite the uncertainty, inheritance tax planning will still be very worthwhile. A range of powerful strategies remain to ensure that as much as possible of your estate will stay in your family after your death.
This article is for general information only and is not intended to be advice to any specific person. This article represents our understanding of law and HM Revenue and Customs practice as at May 2006
