Millions of families across the UK have spent the past two months in a state of confusion over the Chancellor’s plans to mount a crackdown on inheritance tax (IHT).
There was such an outcry over the proposed new rules, tucked away in the small print of the March Budget, that the Treasury was forced into a partial rethink, but the picture is still far from clear.
So Times Money has invited accountants Ian Miles, of Grant Thornton, and Carolyn Steppler, of KPMG, to shed some light on the questions that are troubling our readers.
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What is the clampdown on trusts that the Chancellor
is proposing?
Gordon Brown is aiming to impose fresh IHT charges on the use of certain types of trust, known as accumulation and maintenance (A&M) trusts and interest-in-possession (IIP) trusts, also known as life interest trusts.
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Who will be affected?
Accountants and solicitors reckon that the new regime will hit millions of people with modest wealth who use trusts for a range of legitimate purposes, such as providing for surviving partners and children of previous marriages, as well as passing on wealth to their heirs while preventing it from being squandered.
Has the situation been improved after the Government’s so-called U-turn last week?
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Not greatly, Mr Miles and Dr Steppler say. Middle Britain should not break out the champagne just yet because a lot of the hardline proposals will remain.
One positive thing is that couples will still be able, in their wills, to place assets into IIP trusts tax-free for the eventual benefit of their children, but with a lifetime interest for the surviving spouse.
Will the same tax-free exemption apply if they want to transfer wealth while they are still alive?
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No, individuals will not be able to put assets into IIP or A&M trusts during their lifetime and avoid an immediate IHT charge, as they could before the Budget. Any amount above the nil-rate band of £285,000 will be hit by a one-off 20 per cent charge.
What about insurance policies written in trust?
The proceeds of insurance policies written in trust used to fall outside a person’s estate and therefore were not subject to IHT. Under the new regime, the proceeds of policies written in trust and taken out after March 22 are likely to incur IHT. Policies taken out before then should not be affected, provided that they are not altered.
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Hasn’t there been a concession on A&M trusts?
Not really. Mr Miles says that the so-called concession on A&M trusts, which are used to pass on wealth to children and grandchildren, is not as generous as it sounds.
The Treasury was determined to levy a charge of 6 per cent every ten years on all such trusts unless both income and capital were paid out by the age of 18. (Previous rules simply required income to be paid out to the beneficiary by age 25, with no stipulations about capital.) After criticism that this would hand undue extra wealth to potentially spendthrift 18-year-olds, the Treasury agreed to lift the age at which capital had to be paid out from 18 to 25.
However, it then announced that although people doing this would escape the 6 per cent charge every ten years, they would instead suffer an effective charge of
0.6 per cent a year.
So, overall, the climbdown has been more apparent than real?
Yes, Mr Miles says. “These amendments are not so much a giant U-turn as a modest concession. It is a little like having a death sentence commuted to life imprisonment.”
MARK ATHERTON