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1976 and all that

So what? Well, 1976 is a year from which one cannot escape at present. For example, the result of Preston v Wolverhampton.

No, not another football analogy but a sex discrimination case about pensions involving the Wolverhampton Healthcare NHS Trust.

The result is that successful claimants who pay their share of backdated pension contributions may receive benefits for as far back as 25 years – 1976 again.

Yet another link to 1976, which I want to focus on, relates to giving money, rather than receiving it.

Inheritance tax planning is a year-round topic for advisers. Increasingly, however, advisers find themselves advising clients on existing arrangements, as well as new ones.

As with all legislation, opportunities present themselves through the drafting. The Finance Act 1975, which introduced capital transfer tax (CTT), created the now well known accumulation and maintenance (A&M) settlement. Parliament introduced A&M settlements to overcome the penal tax regime for lifetime gifts levied under CTT.

To benefit from the A&M tax regime, the settlement has to overcome the “age 25 test” that the beneficiaries must either become absolutely entitled to, or acquire an interest in possession in, the trust property by age 25.

However, the original drafting in FA 1975 contained some loopholes. They enabled discretionary trusts to benefit from the more favourable A&M tax regime.

The loopholes were tightened and FA 1976 introduced new restrictions. These restrictions are now contained in S71(2) IHTA 1984.

In summary, to gain A&M treatment, all the beneficiaries must share a common grandparent, or not more than 25 years must have elapsed since the later of the creation of the settlement and April 15, 1976.

If after 25 years the trust does not satisfy the common grandparent requirement and will not pass the “age 25 test”, then it will suffer a tax charge.

The tax charge is levied under S70(6) IHTA 1984 and equates to 21% of the trust fund. However, it does not allow the trustees to benefit from any nil rate band. If an individual settled £10,000 on trusts in April 1976 and the trustees invested it in the FT All Share index then it would have grown to over £500,000. The tax charge would now be more than £105,000!

So, what action can the trustees take to avoid such a heavy tax charge? They can simply appoint benefits to the beneficiaries absolutely or grant them an interest in possession. The cost to the trust of seeking advice will be a mere drop in the ocean compared with the large potential tax charge.

This point highlights that there are other actions IFAs should also be taking to make the most of relationships with other professional bodies.

The Trustee Act 2000 introduces a far more explicit duty of care for trustees and their liabilities are more clearly defined. Also, accountants and solicitors face major changes in the way they do business. This is because of the Financial Services and Markets Act.

Combining the effects of FSMA 2000 with those of Trustee Act 2000 can only lead them to work closer with IFAs who offer more support in investment choices and product offerings for their clients. This is brought into sharp focus by the issue on A&M trusts.

The number of A&M trusts which will actually suffer this charge may be small. However, the impact on a trust fund would be a decline of 21 per cent in its value overnight (April 15 2001, to be precise). Would beneficiaries accept this and not look to sue their trustees for negligence? History shows they are not generally so forgiving.

Preventive actions can be taken, as long as the trust is identified early enough and trustees act quickly. Adding value is not only about gaining new clients – it is also about making sure you look after the older ones too. 



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