STEP Welcomes Government's Changes to Finance Bill to Protect Spouses and Young People

08/06/2006

Following strong representations from the Society of Trust & Estate Practitioners (STEP) and other professional bodies, the government has returned to the pre-Budget position for spouses safeguarded by trusts in wills.

As a result, spouses will not be in danger of losing the family home and Muslim families can still make Islamic wills.

However, the new regime creates a series of different choices for families that may make their existing wills unsuitable. Families are still going to be put to the inconvenience of having to review their wills, especially if they have set up trusts for their children

John Riches, Chair of STEP’s Technical Committee, said: "STEP is delighted that the government has listened to us and has returned to the pre-Budget position for spouse exemptions. This change means that people in second marriages will still be able to use trusts in their wills to protect both their spouse and the children of their first marriage without incurring a tax charge. Muslim families will still be able to use trusts to comply with Sharia law."

Today’s changes also go some way towards allaying fears that irresponsibility would be encouraged by making children receive capital from a trust at age 18. In essence families will have three broad choices, as follows:-

• Give children capital at 18 outright with no ongoing 6% regime;
• Leave children capital on fully flexible trusts with no certainty as to when they will receive their share: in this case, the trust will enter the 6 per cent regime on the death of the parent and remain subject to that regime until capital is paid to the child outright; or
• Leave children the capital on trusts broadly similar to pre-Budget accumulation and maintenance trusts where they must receive their capital by age 25. In this case, the trusts will not become subject to the 6 per cent regime until the child attains age 18 in other words the additional premium to be paid for leaving the capital in trust for 7 years after age 18 is 4.2 per cent.

Mr Riches added, “The government has acknowledged that parents want the flexibility not to have to leave their children everything outright at age 18. The premium for deferring capital entitlement to age 25 using favoured accumulation and maintenance trusts is now only payable after age 18 and families will be able to choose by age 18 whether to pay the additional tax to secure flexibility or hand the capital over.

"We still need to work through the detail of the changes and not everyone will be satisfied but for anyone planning on using a trust in their will, things are looking a lot better than they did on 22 March."

- ENDS -

Notes to editors

• For further information, please call John Riches on 07796-264513 07796-264513 or Keith Johnston on 07884 182636 07884 182636.
• Spouse exemption secured for trusts established under Will or Intestacy. The changes to the IPDI regime set out in the Government amendments are very much to be welcomed. They effectively reinstate trusts established under Will or Intestacy and in turn will eliminate the disruption that would have otherwise arisen to the estates of individuals dying since 22 March 2006.

In many cases, it will still be necessary for individuals who have established trusts under their Wills to review their estate planning arrangements so that they can consider in particular whether, under the post Budget day rules, they wish to establish continuing trusts after the life interest in favour of a surviving spouse or partner comes to an end.

• 18 to 25. Under the original Budget proposals, favoured trust status was only accorded to trusts which provided for capital to pass outright to beneficiaries at age 18. Under the modified proposals, it will now be possible for families to create trusts in favour of children which extend beyond age 18 up to age 25 but only at a price. Qualifying trusts set up under Wills which meet the criteria will enter the discretionary trust regime at age 18 without an upfront 20 per cent charge. The maximum rate of tax which families will therefore have to pay if capital passes to children outright at age 25 is 4.2 per cent.

In some cases, some families may well see this as a price worth paying.

• Existing AMTs. The changes to bereaved minors trusts (BMTs) referred to above will also advantage existing AMTs established before Budget Day. In other words, where beneficiaries are under age 18 at the end of the transitional period on 6 April 2008 the 6 per cent regime will not apply until beneficiaries attain age 18 provided the trusts are modified before 6 April 2008.

This in part reverses the impact on existing trusts but still starts from the premise that leaving assets in trust for children after age 18 is a ‘privilege’ for which a premium in tax should be paid. We do not think that the Government has made the intellectual case or evidenced any form of inappropriate tax avoidance that justifies such a material unlevelling of the playing field as between the ability to make gifts outright free of inheritance tax under the potentially exempt transfer regime compared to gifts in to trust.

Going forward, the ability to use trusts will therefore remain a poor second in fiscal terms to outright gifts which means that many of the socially desirable uses of trusts continue to be penalised.

• Existing life interest trusts. No changes have been made to the TSI regime. Spouse exemption continues to be unavailable on the death of an individual post 6 April 2008.