Millions of trusts face tax sting from Brown’s reform

Gordon Brown has given ground on his proposed shake-up of trust law, but his reform will still hit millions of trusts with inheritance tax, experts say.

The Chancellor’s raid on trusts was launched in his March Budget, which proposed 20% inheritance tax on assets being placed in trust and a further levy of 6% every 10 years.

It would have hit farmers with non-agricultural property and non-business assets in trust.

But heated opposition from financial professionals has forced the Treasury to back down on part of the reform.

So-called life interest trusts, set up in a will to give income to a spouse for their lifetime before passing assets on to their children, will remain exempt from IHT after all.

Mike Harrison, partner at chartered accountant Saffery Champness, said the changes were just a minor success in a continuing battle.

“While the proposed amendments are welcome, they do not go nearly far enough.

They will be helpful for some people, but many more will still be hit by the changes announced at the time of the Budget.”

At the same time, the Chancellor lowered the tax burden on assets placed in trust for a minor through a will, so it will still be possible for such trusts to escape tax altogether until the beneficiary’s 18th birthday.

Another possibility is to place the assets in a discretionary trust, which faces a 6% charge every 10 years from the death of the settlor.

And it will still be possible to put assets into an accumulation and maintenance trust until the beneficiary turns 25, although the 6% charge will apply after 18.

A broad spectrum of opponents, ranging from the Country Land and Business Association to Tory MPs and City accountants, is calling on Mr Brown to end the assault on trusts entirely, dropping the charges planned for accumulation and maintenance trusts.

There are still reckoned to be millions of people in the UK who will face higher tax bills if the current proposals are accepted by parliament. Carlton Collister at Grant Thornton urged farmers to wait until that happened – probably in July – before changing their plans.

“For many, the flexibility provided by trusts to pass assets out of their estates during their lifetime, while not yet giving absolute ownership to the next generation, will mean the potential inheritance tax charges will be an acceptable cost,” said Mr Collister.