When undertaking tax planning for high net worth clients, trusts can be used as a way of sheltering wealth from inheritance tax in a very efficient manner. However, the Conservative Party manifesto plainly said that they intended to review the mis-use of trusts. Thus, there are justified concerns that the Government may soon try to limit the tax advantages of trusts by tinkering with the current tax legislation.
Inheritance tax can often be the easiest tax liability to mitigate. There are various inheritance tax exemptions that can be used (spousal gifts, the annual exemption and gifts out of post-tax income are examples of these). Gifts can be made to other individuals. Certain investments can provide a shelter against inheritance tax. So why use trusts?
Trusts provide asset protection so that family wealth can be ring-fenced through the generations from inheritance tax. They provide peace of mind for high net worth clients with the ability to plan for the timing of charges rather than being subject to inheritance tax on death. Trusts can also be useful for many other purposes, such as providing a stream of income for one or more beneficiaries, paying school fees tax efficiently for grandchildren, protecting assets for a vulnerable person (examples of which include a disabled relative, a sibling with mental health issues or a child who is profligate or has a drug problem) and to hold assets where there are concerns about relationships breaking down.
HM Revenue & Customs have been consulting on “simplifying charges on trusts” since 2012. The consultations, which took place over a few years, did not result in any dramatic changes, but it is likely that this will be looked at again, with a view to increasing the tax take from trusts as they could be seen as an easy target.
Having gone through a snap general election earlier this year, where many proposals were suspended in the initial Finance Bill, it doesn’t take a stretch of the imagination to think that the tax rules relating to trusts may again be reviewed. This could occur in the second Finance Bill or in the Autumn Statement this November.
A Ministerial Statement on 13 July said that the Government expected to introduce a second Finance Bill soon after the House of Commons returns after the summer recess in early September. The Statement also said that the proposals that were omitted from the initial Finance Bill will be included in the second Finance Bill. A large number of these proposals affect the taxation of foreign domiciliaries, which will directly impact on Inheritance Tax receipts. It is possible that the Government may wish to capitalise on this by introducing further reforms.
Inheritance tax paid in 2016/17 was the highest amount ever and totalled £4.84 billion. Although inheritance tax receipts are increasing year on year, the tax affects a small proportion of the population. Therefore any announcements by the Government to levy additional taxes on trusts are likely to be welcomed by the majority of the public and press, and could be seen as vote winners. This would also be more palatable than any direct increase in inheritance tax rates.
It makes sense to take urgent advantage of the current trusts regime alongside efficient gifting to provide peace of mind, asset protection and retention of family wealth.
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