Chancellor’s tax on trusts threatens family assets

Farmers who have tried to safeguard their assets for the future by placing them in trust could see their tax bill rocket after last week’s budget.

Chancellor Gordon Brown announced in the small print of his 10th Budget that assets transferred into trusts would now incur an immediate inheritance tax charge of 20%, with further charges at 10-yearly intervals planned.

Senior tax manager Carlton Collister at Grant Thornton said the Chancellor’s move was radical and totally unexpected.

“This is a serious attack on trusts in general, many of which are not used for tax avoidance, but to protect assets for the future.

“If these proposals go ahead, it is likely that all trusts, and possibly wills that include the creation of a will trust, will need to be reviewed.”

The scant detail so far released by HM Revenue and Customs suggests that all non-charitable and disabled persons’ trusts will be affected.

Notably, this will include accumulation and maintenance trusts, which are often used to pay children’s school fees, and life interest trusts, which pay out income as it arises.

As the proposal stands, transfers into a trust above the nil-rate band of £285,000 will be immediately taxed at 20%.

And from April 2008, these trusts will also be subject to a 6% IHT charge every 10 years and again when any capital payments are made to trust beneficiaries.

“The present evidence is that the various professional bodies are likely to challenge HMRC to see what they are trying to achieve or what arrangements they are trying to counter,” Mr Collister said.

“In the meantime, my advice is not to make any changes to trusts and, in particular, do not add any new property to existing trusts until the meaning of the Budget proposals is clear.”

Further details usually became available about a month after the Budget was presented, Mr Collister added.

Tax partner Jonathan Smith at Strutt & Parker agreed that the wait-and-see approach was best for those with assets already in trust.

“There’s a window for current trusts until April 2008, so people should wait until the bill becomes an act and then use that window to make any changes.”

Another new element of the Budget proposal appears to mean that capital gains tax is payable when a trust is broken up, on top of the new IHT charges.

But Mr Smith said that was likely to be an unintended overlap.

“There has never been an occasion when both taxes were payable and my guess is that will sort itself out as it goes through parliament.”

Farmers would also benefit from the usual CGT taper relief and agricultural property relief.

Nevertheless, it could have a devastating effect on the value of people’s assets if it did pass into law.

Tom Allen-Stevens, who runs a diversified farm business near Faringdon, Oxon, said the trust set up to look after cottages when his father handed down the 450-acre farm would face a colossal tax bill if it was broken up to avoid paying the new charges.

“We would have to pay CGT on the current value of £350,000 less the 1982 value – about £300,000 in total and a tax bill of £120,000.

This may mean the cottages would have to be sold, breaking up the estate.

“Our trust was specifically set up to ensure we could keep the estate together and retain the structure we feel is crucial to the health and vibrancy of our little rural community.

“Gordon Brown has shown that he hasn’t got a clue about our way of life with the way he has decided to rampage through with yet another tax on the countryside.”

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