Moral intentions attacked

I had a sense of déjà vu recently when considering what the future holds for trusts. It started with the government’s ‘attack’ in the Finance Act 2006, and next year’s Finance Bill could continue the trend.

In December’s Autumn Statement, George Osborne announced a further consultation on the proposal to split a settlor’s nil-rate band among the number of trusts created. When it was first mentioned in July 2012, it faced such controversy and negative feedback that we all hoped it would be dropped and forgotten about. Not so.

Currently, each trust can effectively have its own nil-rate band (£325,000) and this enables many smaller trusts to fall outside the tax charge and reporting requirements for relevant property trusts. If the proposal is brought in, though, each trust must share a nil-rate band with the other trusts a settlor has created in the relevant (generally ten-year) period. This will push many trusts over the threshold and lead to inheritance tax (IHT) charges on ten-year anniversaries and exits and/or reporting requirements and increased administrative costs.

After the Finance Act 2006, many smaller trusts were wound up because of higher running costs. Recently, the Revenue announced that its tally of trust and estate tax returns dropped by 16,500 in 2010/11. I fear even more trusts will go the same way if these proposals come in.

A particular impact will be on multiple pilot trusts, i.e. a series of trusts created on different days by the same settlor to hold a large sum of money. Using such trusts is a long-established form of tax planning (see Rysaffe [2003]) and is acknowledged as acceptable in the Revenue’s general anti-abuse rule guidance.

However, if the changes come in, such trusts would effectively be stamped out. There would probably be fierce criticism in the industry over the Revenue’s inconsistent approach and possibly a case for a “legitimate expectation” argument under judicial review.

Many have queried whether the government has done its research and investigated the impact these proposals could have on existing trusts and the future of trusts generally. The original consultation was devoid of statistical forecasts. Trusts are set up for genuine, deserving reasons, and not always for tax planning.

I regularly see clients setting up trusts, often in their wills, for young children and grandchildren, who could otherwise inherit a large sum of money at an age when they cannot manage it. I have seen clients set up trusts for adult children who may be at risk of a divorce claim, bankruptcy or are simply vulnerable to influence.

Pension, life insurance and death-in-service benefits are another example. One of my new clients doesn’t have sizeable liquid assets but does have a valuable death-in-service policy with his employer. He has a young family and wants to ensure that the benefits will be available to provide a cash fund if needed.

Traditionally, I would have suggested a series of pilot trusts, to prevent the money being lost periodically to IHT. But the proposed changes would result in a greater share of the benefits being paid in tax. Considering that these trust funds are often established to provide for a family if the main breadwinner dies, it seems morally wrong.

The consultation is expected imminently and I hope it genuinely takes into account the many legitimate concerns that have been raised. However, it looks like the government will stand firm on the subject, and perhaps the best we can hope for is a watering down of the proposals.

For those of us who know how important trusts are for estate planning and asset protection, it is a battle worth fighting.

Fay Copeland is partner and head of private client at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser