.gif)
Gordon Brown didn’t mention it in his Budget speech – instead, it was tucked away in an obscure Treasury document called Budget Note 25. It has caused such an outcry, that lawyers and insurance companies such as Prudential and Standard Life have stopped writing wills and selling certain types of life assurance policy until the impact becomes clearer.
A belated concession has taken pre-existing life assurance policies written in Trust out of the net. But Kevin Martin adds, "Even if insurance policies are not caught, millions of people will still need to review their wills. This is tantamount to retrospective legislation because there has been no consultation and no debate."
So what happened to cause all the fuss? The new rules target so-called ‘Accumulation and Maintenance Trusts’ (A&M) and ‘Income in Possession Trusts’ (IIP). These trusts are typically to provide for a child’s education or to give a spouse or widow an income for life with the capital eventually passing to the children.
But it now seems the effect could be far wider and hit all types of Trust used in Inheritance Tax Planning. Until now, married couples have often been advised to use Trusts, so that they would escape Inheritance Tax upon the first of them to die. IHT would only be payable upon the second death, where the assets exceeded the IHT threshold.
Now it seems, that where there is a Will, which involves a Trust, Inheritance Tax may well be charged on the first death. Assets above £285,000 going into a Trust would be subject to a 40% tax charge – the first time money going from spouse to spouse has been taxed in years.
The bad news does not stop there. Gifts into Trusts used to be exempt from tax if the donor survived seven years (so-called “Potentially Exempt Transfers”). Now, the donor has to pay 20% of the value of the gift over £285,000 when the Trust is set up, and 6% of the increasing value of the gift in the Trust every ten years.
And it’s not as though you can rest easy in the fact that the Inheritance Tax threshold will necessarily come to your aid. Whilst house prices have risen 176% over the past decade, the value of the nil-rate band for IHT (now £285,000) has gone up by just 85%. A high proportion of detached houses in England and Wales are at risk of being caught by the Tax.
Calculate the likely Inheritance Tax due
You need to add up the value of all of your assets, take off your liabilities, take off the IHT threshold (currently £285,000 for 2006/7), and see what you have left. If you have a negative figure then you don’t have an IHT problem. If you have a positive figure, then the Chancellor will want 40% of that positive figure.
List your assets and decide to whom you would like them to pass
You should make a list of your assets and their values, as well as how you would want them distributed in the event of your death. There are numerous books on the market that can help you where to start, such as Lawpack's 'Tax Answers at a Glance' with easy-to-use tables that you fill in.
Make a Will
You may find it difficult to find a professional adviser to help you until the IHT situation is clarified, so one option could be to use one of the self-help products available, such as Lawpack’s Last Will and Testament Kit. Whilst this will not specifically deal with Trusts, it will mean your assets pass to whom you want them to pass, and will not be subject to the rules on intestacy.
If you have already written a Will, consider waiting until things become clearer before re-writing it. A powerful lobby of opinion is urging the Treasury to come clean about the effect of the change, and to postpone it until the government has had proper consultations with solicitors, insurers and financial advisers. For Wills and Trusts set up before Budget Day (22nd March 2006), you have until April 2008 to make any changes without being penalised.
In the meantime, you might well be advised to at least take professional advice and get your IHT calculation checked. The best professional advice on lessening the impact of IHT mitigation may well come from someone who specialises in IHT mitigation and not necessarily from a high street accountant, financial adviser or solicitor.
Whatever you decide to do, make sure your survivors will have enough to live on. There is no point in constructing a wonderfully-efficient scheme that works for tax, if the money is tied up and not available when needed. As the old saying goes, “you can’t take it with you” – a saying that is certainly true with the current Chancellor!
Hugh Williams is a tax partner at HM Williams Chartered Accountants which has clients ranging from multi-million pound household name organisations to individual taxpayers. The firm has won the Daily Telegraph/ Energis Customer Service Award and the Butterworth's Tolley National Award for the Best Tax Team in a Small to Medium Size Firm. Please note that they are unable to give individual advice to non-clients.
Useful Publications
Tax Answers at a Glance
101 Ways to Pay Less Tax - new 2008/09 edition
Tax - Your Questions Answered