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Relaxing times

Continuing to look at the amendments to this year’s Finance Bill

Over the past few weeks, I have been considering important amendments to the Finance (No 2) Bill 2006 as it originally stood. I have looked at the extension to the bereaved minors’ trust definition and the widening out of the definition of interests under trusts that qualify for treatment as immediate post-death interests.

Both relaxations provide exemption from the discretionary trust regime. The extensions to these relaxations apply on the death of the donor and came about, I assume, as a result of coherent and persuasive representations made by professional bodies representing the tax and legal communities.

These bodies were not alone. The Association of British Insurers had clearly been doing its job, too, and this would seem to have resulted in the extension to the definition of the transitional serial interest.

As a result, this week I would like to turn my attention to the Government amendments in respect of extending the transitional serial interest provisions to certain pre-Budget life policy/trust combinations.

Here is what may be another example of how forceful but reasonable representation and pressure can bring about change.

In summary, the change means that if a beneficiary with an interest in possession under a pre-Budget life policy trust dies, even after April 5, 2008, and the trust continues after their death, it will be excluded from the mainstream inheritance tax charges to tax, that is, the discretionary trust regime.

This is a very sensible amendment. Presumably, the rationale is that, unlike a positive act of appoint- ment by, say, the trustees changing the beneficiaries, death is not something that can be controlled.

By the way, a new phrase has been coined – the “earlier interest end-time”. Elegant or what? It describes the coming to an end after April 5, 2008 of an interest in possession that existed before March 22, 2006.

In closing on this point, it is interesting to note that this exclusion from the mainstream charge does not apply to non-life insurance pre-Budget trusts where the beneficiary’s death occurs after April 5, 2008.

On the continuation of premiums, it was the Revenue’s original stance that no legislation was necessary to give transitional protection as there was no addition to the settled property being made – the policy was merely being maintained. This view presumably changed as we now have the relaxation in legislation. This will be seen as reassuring by many.

Most in the insurance and financial advice business will, however, have expected this relaxation. It follows a similar path taken when life assurance premium relief was at stake. It is also in line with the stated Revenue view in its guidance note issued soon after the Budget.

It is in respect of the “allowed variation” that most interest has been shown. Many were hopeful that automatic contractual changes, for example, indexation increases and so on, under pre-Budget policies would not cause the policy/trust to fall into the clutches of the new regime. This appears to have come to pass. However, by virtue of the definition of the allowed variation, we appear to have gone further.

Let me explain. It is in the new section 46A of IHTA 1984 that is constituted in Amendment D that the definition of “allowed variation” can be found at sub-section (5). It states that “allowed variation, in relation to a contract, means a variation that takes place by operation of, or as a result of, exercise of rights conferred by provisions forming part of the contract immediately before March 22, 2006”.

Under this provision, it would seem that provided the exercise that takes place is of rights conferred by the provisions of the contract that was in trust before midnight of March 21, 2006, protection from the discretionary trust rules will be continued. There appears to be no restriction of any sort on this provision and many may therefore see it as extremely generous. I am sure that a close analysis of many pre-Budget policy documents will be carried out to determine what can and cannot be safely done.

More amendments were tabled by the Opposition but, at the time of writing, none seem to have been accepted. Notable among them was that proposing that a life protection plan (broadly speaking, one providing life cover of at least 10 times the highest premium payable in a year) held in trust would be exempt from the discretionary trust regime. This seems to be a variation on the original ABI idea of a non-abusive policy, that is, one under which premiums were exempt from IHT.

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