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Concerns about impending Finance Bill

Government plans could unpick wills of parents and carers

18 March 2013

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Thousands of wills may need to be rewritten because of a government proposal that will affect trusts set up to provide for children in the event of them being orphaned.

The plan is an “unintended consequence” of the forthcoming Finance Bill, said the Law Society, which has lodged its concerns to HMRC.

Lucy Scott Moncrieff, president of the society, said: “I’m sure the government doesn’t intend to penalise orphaned children, or to require a significant number of parents to redraft their wills to protect their children’s futures.”

Proposed new rules would mean that trustees might not be able to, for example, acquire a home for the beneficiary or meet education or maintenance costs, without court involvement.

This could cost trusts, and their beneficiaries, thousands of pounds.

Law firm Boodle Hatfield has also made representations to HMRC about vulnerable beneficiary trusts (see below comment).

The Finance Bill 2013, which includes new tax charges on high value ‘enveloped’ residential property, a statutory residence test and a general anti-abuse rule, publishes on 28 March.

Vulnerable beneficiary trusts: will-drafting warning

“There is a lot going on in private client tax. It is perhaps no surprise then that the provisions concerning ‘vulnerable beneficiary trusts’ have fallen under the radar of many practitioners.

“The main change is a new definition of ‘disabled person’ following changes in the benefits system. At the same time, the legislation aligns the different qualifying conditions for vulnerable beneficiary trusts across different taxes. This is sensible, but it is not well known that ‘vulnerable beneficiary trusts’ include not only disabled trusts but also trusts established on death for bereaved minors and 18–25 trusts.

“Bereaved minor trusts (BMTs) and 18–25 trusts are required to secure that if any of the settled property is applied for a beneficiary, it is applied for the benefit of the bereaved minor. The statutory power of advancement in section 32 of the Trustee Act 1925 is ignored. This avoids any doubt that the qualifying conditions could be breached because, for example, there are default beneficiaries to whom the power could, in theory, apply.

“However, one of the proposed changes is to remove the ‘power of advancement disregard’ for trusts created after 8 April 2013. That could reintroduce uncertainty about whether trusts qualify unless the power is restricted by the will.

“The problem is that wills containing these trusts made before 8 April 2013 do not come into effect until the testator dies and these are not grandfathered by the draft legislation as it stands (for 2012/13 year). It also seems odd that there is scope for inconsistency between BMTs arising on intestacy and BMTs created by will as section 32 applies automatically to intestacy trusts and cannot be avoided.

“Representations have been made to HMRC and hopefully they will reconsider the merits of removing the power of advancement disregard. Otherwise we might have to revisit
our will precedents again.

“But it is worth waiting for the next draft of the Finance Bill. Whatever the outcome, schedule 1 should certainly not be overlooked by anyone writing wills.”

Emma Haley is a senior associate in Boodle Hatfield’s private client and tax team


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Vulnerable Clients Wills, Trusts & Probate