Patrick Roach
New Trust Tax Rules
The Finance Bill has made its way through the Committee stage in the House of Commons. The proposals to change the taxation of trusts have been reviewed. The Finance Committee recognised that Will Trusts should not be hit with Chargeable Lifetime Transfer (CLT) rules as originally proposed under the Budget.
Under the Budget proposals a large number of Wills would have been forced to pay a 20% tax charge on assets held in an interest in possession trust established by the deceased spouse’s Will if the Inheritance Tax Nil Rate Band had already been utilised, which it would have been in most cases. The Committee has recommended that the situation prior to the Budget should be reinstated. It looks as though common sense and fairness will prevail in this instance.
I also understand that IOU Discretionary Will Trusts, usually set up if the house is the main asset, still continue to work without being subject to the new proposals. This is still an accepted way of protecting the value of the Nil Rate Band of the first spouse to die, saving a potential £114,000 of Inheritance Tax.
Providers of Discounted Gift Plans have had to take a good look at their trust forms to ensure that these comply with the new proposals. Discounted Gift Plans are designed to allow a proportion of the investment to be outside your estate from day one, with the balance outside after seven years. In the meantime the investors can take regular withdrawals for the rest of his or her life.
The gift will now fall under CLT rules which means that a gift of more than the Nil Rate Band will be subject to tax at 20% (effectively 25% as the investor has to pay tax on the grossed up amount of the gift). However, this is only likely to be an issue where the amount invested is greater than the Nil Rate Band after the discount has removed part of the investment from the estate. Realistically a 70 year old woman with normal life expectancy, taking 5% withdrawals annually, would need to invest more than £650,000 without creating an immediate tax liability, assuming that no previous Lifetime Transfer had been made.
If the gift is greater than the Nil Rate Band you can still avoid the immediate tax liability by making the gift to an absolute trust instead of a discretionary or interest in possession trust.
The new trust tax rules will take a little getting used to, use our contact page to request further information or request an initial discussion with no charge or obligation.
Taxation rules can and do change.