Date of issue: 25th April 2006

LEGISLATION CHANGES PUTS FINANCIAL PLANNING ON HOLD

Shona Cutler, partner and personal taxation specialist at Birmingham accountants Clement Keys, maintains that family trusts are not so much a tax planning tool as a way for people to hold their assets in today's world of complicated family structures and is therefore highly critical of the Treasury's decision to tax them retrospectively.

The new rules also potentially bring assets left in trust to a surviving spouse into charge for Inheritance Tax on death.

Under the rules set out in the Finance Bill 2006 assets in held in Interest in Possession Trusts and Accumulation and Maintenance Trusts will bear increased tax burdens unless the beneficiary is disabled or the trust ends when the beneficiary reaches 18 years of age.

A 20% tax charge may arise on assets being put into such trusts, a maximum charge of 6% will be levied on the value of assets every 10 years and there will be a further charge at a maximum of 6% when the capital is paid to the beneficiaries. This brings the taxation of certain interest in possession trusts and accumulation trusts in line with the tax treatment of discretionary trusts. The new rules will not impact on discretionary trusts or discretionary will trusts which are the number one way of saving inheritance tax on the death of the first spouse!

Lobbying by accountants and tax experts over the draconian measures included in the Budget - but not in Gordon Brown's speech - has resulted in a partial U-turn by the Chancellor, but Mrs Cutler is concerned that thousands of Midlands families will still be affected by the changes and further changes to the Finance Bill are required

"Trusts have grown in popularity because of the complex nature of modern family life and despite the Chancellor's climb down over taxing life insurance payments going into a trust, there is no excuse for retrospective legislation that will impact fundamentally on arrangements set up prior to budget day designed to protect families without a period of proper consultation and warning," she says.

"Because the new rules apply to existing trust arrangements, as well as new trusts the legislation is retrospective and I think that is the wrong way to go about what is being headlined as modernising the system."

When people remarry and raise a second family an Interest in Possession Trust is commonly set up or incorporated in wills to ensure that the surviving spouse is protected but that the assets ultimately pass to the children, while an Accumulation and Maintenance Trust is often set up by grandparents with a view to helping to support the grandchildren and possibly pay for school fees.

In addition, everyone who has included trusts in their Wills, other than Nil Rate Band Discretionary Trusts, will have to go to the effort and expense of reviewing the small print in order to ascertain whether alterations are required to prevent large tax charges arising.

Mrs Cutler, who is a member of Society of Trust and Estate Practitioners, says that changing a trust is not always possible and may not be easy. It will be the responsibility of the trustees, not the person who set up the trust, to decide whether the terms of the trust should be changed and this may require leave of the Court.

"We are still examining the details of the Finance Bill but I would advise people to look at their wills immediately to see whether a tax charge will now arise on death and to take prompt action if this is the case. It may also be necessary to amend Wills again when the details of the new legislation are finalised," says Mrs Cutler.

"When the new rules are clear we can advise individuals as to the best course of action based on their particular financial planning needs and family circumstances."