Pre-Autumn Statement - Trust Briefing

One of our legal partners has put together this pre Autumn announcement commentary on the expected changes to trust rules

It is anticipated that the Autumn Statement (Thur 5 Dec 2013) will confirm the consultation changes to simplify the taxation of trusts for Inheritance Tax (IHT) purposes. Some of the changes will be welcomed if adopted, however one anticipated change is likely to have a minor adverse effect on clients who may have transferred assets into trust during their lifetime. Post statement observations may focus on minor taxation effects and total perspective needs to be maintained in order for appropriate trust advice to continue to be provided. The vast majority of clients with existing trusts will not need to make any changes to their existing arrangements at this time, but financial planners may need to modify their advice to new clients.

1) Context

"Trusts still remain the best mechanism for protecting and controlling family wealth. They are

also tax efficient. They will often be the solution".. M. Hansell . Mills & Reeve LLP

Erosion of family wealth occurs primarily through social impacts, such as failed relationships,

bankruptcy, etc., and generational taxation primarily impacts larger estates. The proposed changes are

only likely to immediately impact individual clients who have settled more than £325,000 into trust

during their lifetime. Even if this level is exceeded, maintaining existing arrangements will still be

more advantageous for nearly all clients.

Question: If a client only has an established death benefit trust for pension and DIS benefits (Asset Preservation Trust (APT)) do they need to be concerned? Highly unlikely, a trust like the APT has already been drafted to allow for any beneficial consolidation.

If a client has a couple of Assurance Trusts for death benefits will they need to take any action?

Highly unlikely, a trust like the Assurance Trust has already been drafted to allow for any

beneficial consolidation.

If a client has an estate planning framework (Family Trust / Solidus Plan, Beneficial Protection Plan or Legacy Plan) in place for their residual estate death benefits will they need to take any action? Highly unlikely, the client should only need to review the status at the time of death.

 

2) What are the Expected Changes?

2.1 The reporting dates of trusts are to be simplified e.g. multiple pension death benefits going into

trust. This is anticipated to be beneficial .

2.2 The treatment of PETs and CLTs is to be simplified, which is a welcome change in dealing with

PET taxation when a client makes a chargeable lifetime transfer.

2.3 The .periodic charge. rate is to be fixed at 6% across assets exceeding £325,000 on each 10th

anniversary of a trust.

2.4 The key financial impact on larger estates is that Rysaffe benefits will be removed. This

means the small periodic charge will be applied to the total value of assets an individual settles

into any number of discretionary trusts during their lifetime and for death benefits above

£325,000.

Financial Case for Trust Planning

HMRC would collect more revenue if trusts did not exist.

 

However, clients would do well to remember and reaffirm the protective benefits, as well as the significant financial benefits. The financial case alone is overwhelming:

Two clients have £500,000 in SIPPs.

Mr Trustless makes no trust arrangements for his SIPP. His SIPP fund passes to his wife and

following her death a total of £200,000 in IHT is paid on the SIPP assets. Twenty years later, their

child, who inherited the residual SIPP funds, dies and the grandchildren pay tax on £300,000

attributable to the SIPP funds, which is a further £120,000. This brings the total IHT paid to £320,000

in 20 years.

Mr Wise directs his death benefits into an Asset Preservation Trust on his death. On the death of his

wife, the loaned sum is repaid to her husband's trust and no IHT is paid. On the death of their child 20

years later, a loan is also repaid. During the 20 year period, trustees pay a total of £21,000 in periodic

IHT charges.

The basic arithmetic confirms the massive benefit of trust planning from a tax viewpoint and when the protective benefits are added the continued case for trusts is overwhelming. Financial planners, on behalf of their clients, need to keep a perspective on this unwanted, but relatively minor, tax and should continue to advise on the use of trusts whilst making clients aware of the potential for periodic charges.

Example 1

Mr Smith has a single APT in place to receive his £300,000 SIPP death benefits. He has no other

trusts in place. Should he be concerned?

No, the changes will not impact Mr Smith's planning.

Example 2

Mr Smith has a single Assurance Trust in place to receive his death benefits from a single life policy.

He has no other trusts in place. Should he be concerned?

No, the changes will not impact Mr Smith's planning.

Example 3

Mr Smith has two Assurance Trusts in place to receive his death benefits from two £250,000 single

life policies. He has no other trusts in place. Should he be concerned?

No, the changes are unlikely to have any immediate impact, but advice will need to be taken by

trustees on the death of the settlor.

Example 4

Mr Smith has a Protective Gifting Trust in place and a Beneficiary Protection Plan with two trusts. He has made a gift of £50,000 to a beneficiary via the Gifting Trust. Should he be concerned?

The changes are unlikely to have any immediate impact, but our advice is that any clients who have

made lifetime transfers should seek reassurance and take advice.

Example 5

Mr Smith has a provider Bond Trust in place which consists of £250,000 and a Death Benefit Trust

for his DIS. Should he be concerned?

The changes may have an immediate impact unless HMRC have responded to industry input.

Currently our advice is that any clients who have bonds in trust should seek reassurance and take

advice if they have any other lifetime (pilot) trusts in place.

Example 6

Mrs Smith has a Family Trust / Beneficiary Protection Plan with two trusts in place for her family. Each trust should receive £350,000 after the payment of any taxes. Should she be concerned?

No. The changes will not have an immediate impact on Mrs Smith's framework and the change in

periodic charge assessment will have no negative tax impact on her children. The benefit of discrete

trusts should far outweigh the requirement to make a basic tax return every 10 years. If the trust funds

did not exceed £325,000 in value, then, if the minor tax charge was important to trustees, the

Beneficiary Protection Trust already has consolidation powers.

 

 

3) Next Stages

Clients should not feel panicked into making immediate changes to existing planning, as historically

clients have been given adequate time periods to comply with changes. You may wish to consider the

following:

· The Autumn Statement is a confirmation of direction and, frequently, changes occur between

the Autumn Statement and the Finance Act.

· There are likely to be a number of clarifications sought from HMRC over the next few

weeks.

· Only clients with significant lifetime transfers already in place are likely to require considered

advice between now and July, and this is not a certainty.

· The vast majority of clients will be unaffected.

Next week we will review proposed changes with our legal partners and further guidelines will be

made available

 

Advice on individual cases cannot be made at this stage.

A further blog post will be made after the announcement and after we have considered the content