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Trusts u-turn
In a surprising but welcome change of heart, the Treasury has made changes to its proposed legislation on trusts for minors and interest in possession trusts, although a Treasury spokesman says that these amendments were what was always intended, begging the question so did the Finance Bill wrongly include all the clauses now deleted?
Minors
Amendments to Part 1 of Schedule 20 of the Finance Bill will allow the new bereaved minors' trusts rules to apply to trusts capable of continuing beyond age 18, so long as the beneficiary will take the trust assets absolutely no later than age 25.
These amendments supplement the provision in Sch 20 for trusts for bereaved minors terminating at age 18 with broadly parallel provision for age 18-to-25 trusts. In either case, the trust assets will be exempt from the inheritance tax periodic charge on trust assets so long as the beneficiary is under 18, and will be exempt from the exit charge on trust assets if the beneficiary takes the trust assets absolutely at that age. But inheritance tax charges will start to apply to assets in an age 18-to-25 trust if it continues beyond age 18. They will be charged on exit and calculated on the same basis as the mainstream exit charge, so in practice the assets will be subject to seven years' worth of charge if the trust continues for the maximum duration up to age 25. A claw-back charge will apply (as it does to assets leaving an accumulation and maintenance trusts or trusts for bereaved minors) to assets leaving an age 18-to-25 trust in an irregular way. The new treatment will also apply to existing accumulation and maintenance trusts which satisfy relevant parts of the age 18-to- 25 conditions by 6 April 2008.
Spouses
Another group of amendments to Part 2 of Sch 20 modify the conditions for trust property to qualify as an immediate post death interest for inheritance tax purposes, in order to remain outside the mainstream inheritance tax rules for discretionary trusts. They remove the third and fourth conditions necessary for a trust to qualify as an immediate post death interest trust, i.e. that the interest can only be terminated with the consent of the person with the interest (in their favour), and that once the trust comes to an end the trust assets must generally pass into absolute ownership. They also provide for termination of the trust in favour of ongoing trusts for a bereaved minor or a transitional serial interest to be counted as a potentially exempt transfer by the person whose interest ends; and provide for immediate post death interest trusts created in favour of a spouse to be disregarded when charging the trusts created in the death of the same testator.
Playing down any climbdown, a Treasury spokesperson says that the amendments were 'straightforward clarifications of the Government's original and unchanged policy. Amendments to draft legislation are not unusual, this is precisely what the Parliamentary process is for'. The Treasury persists in its assertion that the 'legislation will not and has never affected millions of people'. It was 'always clear that spouse exemption should always be allowable regardless of whether assets were left outright or into a trust when a spouse died. The legislation now makes clear that new rules for trusts do not affect entitlement to spouse relief'.
With regard to trusts for bereaved minors, the Treasury spokesman says that the Treasury's 'intention was always that if the assets did not come out of the trust when the child reached adulthood at the age of 18, there would be a tax charge on the trust. There has been a technical amendment that now means charges on trusts for bereaved minors will only accrue from age 18 onward.' This amendment will reduce the burden on parents while maintaining the Government's original and unchanged policy intent.
As to trusts for disabled people, the spokesman said that a technical change would 'ensure disabled people are exempt from the new tax rules has the Government has always intended and made clear. Before this amendment there may have been some cases of complex trusts for disabled people falling outside of the rules'. Individuals with serious degenerative conditions, who will be eligible if setting up a trust for their own future benefit, would also be covered.
John Riches, chair of STEP's technical committee, says that STEP was delighted that the Government has listened to representations and has 'returned to the pre-Budget position for spouse exemptions'. He says that it means that 'people in second marriages will still be able to use trusts in their wills to protect both their spouse and the children of their first marriage without incurring a tax charge. Muslim families will still be able to use trusts to comply with Sharia law'.
He says further that the changes 'go some way towards allaying fears that irresponsibility would be encouraged by making children receive capital from a trust at age 18'. Families now have effectively three choices. They can:
- give children capital at 18 outright;
- leave children capital on fully flexible trusts with no certainty as to when they will receive their share: in this case, the trust will enter the 6% regime on the death of the parent and remain subject to that regime until capital is paid to the child outright; or
- leave children the capital on trusts broadly similar to pre-Budget accumulation and maintenance trusts where they must receive their capital by age 25. In this case, the trusts will not become subject to the 6% regime until the child attains age 18, in other words the additional premium to be paid for leaving the capital in trust for seven years after age 18 is 4.2%.
The latest announcement largely, although not totally, allays fears that all existing wills need to be redrafted. Will trusts for a surviving spouse no longer need to satisfy detailed rules and will trusts for children can continue until they are aged 25 subject to what will generally be a small tax charge. There are also amendments to deal with lifetime trusts created or varied on divorce but these are being tabled by the Conservatives and so it remains to be seen what will come of them. Malcolm Gunn of Squire, Sanders and Dempsey says 'there is no sign of any real change in policy in relation to lifetime settlements although we will know more after the standing committee debate on 13 June. At present a new settlor interested trust will be a financial disaster: 20% inheritance tax entry charge, no capital gains tax hold over, ten yearly inheritance tax charges, all income and gains taxed on the settlor, and a gift with reservation charge on death as well'.
Smith & Williamson's Francesca Lagerberg also welcomed the changes, but she added that 'the changes do not address all the problems created by the Finance Bill. People will still to make decisions on whether they need to change their will if a trust is written into it. Those with divorce agreements involving trusts will need to consider if painful negotiations need to be reopened. There are also still outstanding technical issues to address'.
Saying that the Treasury's new position was very good news, Kevin Martin, Law Society president, said that 'solicitors will welcome the fact that many millions of their clients will not now have to go through the expense and trouble of having their will reviewed'. However, he urged the Government to deal with other concerns. In particular, he says that 'existing trusts will still be adversely affected by the proposals, as will lifetime trusts such as those established on divorce'.
Exchange rates
The exchange rates for the year ended 31 December 2005 and 31 March 2006 are published in a handy 'cut out and keep' style on pages 293 and 294 of this week's issue.
