threesixty Predicts Way Forward for Taxation and Trusts
threesixty, the fee-based IFA support services provider, expects providers to launch new versions of ‘Discounted Gift trusts’ following the controversial changes to tax on trusts in the Budget.
The ‘Flexible’ trusts used in many lump sum IHT arrangements prior to the Budget have now become less attractive. Flexible trusts are those in which the trustee retains the right to appoint benefits away from one beneficiary in favour of another.
They have become less attractive not because of the amount of tax charged, which is likely to be relatively small, but because of the complexities involved in calculating the liability and the reporting requirements associated with them.
threesixty anticipates flexible trusts will be superceded by ‘Absolute’ or ‘Bare’ trusts, which take on new importance under the new tax rules.
Clients should have the option of using Absolute or Bare trusts instead of flexible trusts going forward, according to threesixty. Payments to a Bare trust will qualify as potentially exempt transfers, even under the new rules. Such trusts do not fall within the definition of Relevant Property Trusts and thus will not attract either periodic charges (the IHT charge made on trust assets on each 10-year anniversary) or exit charges levied when assets leave a trust.
Clients who require the flexibility to appoint benefits away from one beneficiary in favour of another can still be offered a Flexible trust, but this can incur a 20% charge upon creation, a tax charge every 10 years and an exit charge if the trust value exceeds the nil rate band, in addition to the complex paperwork. Clients who do not need this flexibility can use Absolute or Bare trusts and avoid the new complexities. Given that most lump sum IHT arrangements are set up by individuals aged in their 70s whose children are already adult, the need for flexibility in this area may not be very great when balanced against the IHT issues.
David Ingram, a partner at threesixty, commented: “Providers are beginning to reach the same conclusions as us and we expect some will be launching new versions of Discounted Gift trusts using Bare trust arrangements. We welcome the speed at which some providers have moved to ensure that there is no planning vacuum following the Chancellor’s announcement.”