Chancellor Gordon Brown delivered his eleventh Budget on March 21. After all the changes to the inheritance tax regime for trusts set out last year, many commentators were wondering whether there would be fundamental changes to the structure of IHT this time round.
The abolition of the potentially-exempt transfer, the extension of the seven-year period before lifetime gifts fall out of account to 10 years and an increase in the maximum 6 per cent rate of tax to be applied to discretionary trusts valued at over the nil-rate band on each 10-year anniversary were all ideas that were mooted in the run up to the Budget. In reality, none of the above came to pass.
The nil-rate band for gifts made on or after April 6, 2007 increased to £300,000 but we knew about this already. We also knew about the increases for the next two years to £312,000 for 2008/09 and £325,000 for 2009/10. However, we were told there would be quite a significant increase of around 7.7 per cent in the nil-rate band for 2010/11 to £350,000.
This is important because if the nil-rate band continues to increase at around 4 per cent, by 2016/17 it will be around £443,000.
The significance of that is that the tenth anniversary of all those discretionary trusts which started in 2006/07 will fall in 2016/17, so this will be the nil-rate band relevant for determining whether or not there is a 10-yearly charge at that time.
Remember that where there are joint settlors under a trust, two nil-rate bands will be available at the 10-yearly anniversary, giving a possible total of £886,000 before a charge may arise.
So all good news for those involved in the provision of IHT planning advice to clients but there was even better to follow.
Readers will be aware that, following the changes to the IHT treatment of trusts last year, HM Revenue & Customs had taken the view that a gift into an absolute trust for the benefit of a minor beneficiary was a gift into a settlement and thus was a chargeable lifetime transfer rather than a Pet. This meant that if any gift exceeded the donor’s available nil-rate band, there would be IHT to pay.
HMRC did recognise that its view was not shared by all in the industry and therefore was seeking further advice before forming a definite conclusion. That advice has now been obtained and the good news is that HMRC has revised its opinion.
In relation to trusts for minors, the provisions of s31 Trustee Act 1925 will usually apply during the minority of a beneficiary. This means that the trustees will have discretion to apply the income of a trust fund for the maintenance, education or benefit of a beneficiary. Under s31 (2) Trustee Act 1925, any surplus income must be accumulated.
The question is whether an absolute trust for a minor can be regarded as a settlement for IHT purposes under s43 (2) IHTA 1984, given that this provides that a settlement includes any disposition whereby property is held “on trust to accumulate the whole or part of any income of the property or with power to make payments out of that income at the discretion of the trustees” (IHTA 1984, s43 (2)(b)).
In HMRC’s view, an absolute trust of this kind is not a settlement for IHT purposes. It feels that s31 Trustee Act, including s31(2), contains provisions which are essentially administrative in nature rather than dispositive. The trustees’ discretion in relation to an absolute trust is limited to deciding how much income they spend for the benefit of the beneficiary and how much they retain on the beneficiary’s behalf.
As a result, a lifetime gift on trust for a minor absolutely, whether or not the provisions of s31 Trustee Act are excluded, is a Pet.
This will be of great comfort to those clients who might have effected discounted gift schemes in absolute trust for minor beneficiaries for amounts in excess of the nil-rate band before the potential problem became widely known.
So the IHT regime emerged unscathed from the Budget and the familiar lump-sum planning strategies, such as discounted gift schemes and loan trusts, remain very useful planning tools for the future.
Brian Murphy is financial planning manager at Axa Sun Life.