Gary Heynes, Private Client Group Partner at Baker Tilly, said Friday’s proposals, which suggest a single nil rate band to be split across all trusts opened by any individual settlor, would result in direct gifts becoming the favoured tax efficiency solution.
Currently, all trusts created by a settlor have a nil-rate band of £325,000. But if the proposals become law, then trustees of all trusts set up by an individual settlor will have one nil rate band (currently £325,000) to share between them in proportions designated by that settlor, inhibiting planning strategies which use multiple trusts to reduce total IHT charges.
But Heynes believes the proposals neglect other, less contentious, reasons for setting up trusts.
“Trusts are used to protect assets,” he said. “Typically parents and grandparents who have built up wealth in their businesses or investments want to pass that wealth on in a controlled way, particularly to younger beneficiaries.
“But we now have a tax system which favours passing this wealth to very young people, from age 18.”
He added that trusts should be tax neutral so settlors have a choice of which route to take: “With the high levels of income tax, capital gains tax and the prospect of increased inheritance taxes as well as the likelihood of a public register of beneficiaries and assets, as recently voted for by European MEPs, trusts have now become much less attractive.
“All of these issues put trusts on a very unequal footing to direct ownership and may be the final nails in the coffin. RIP trusts.”
His views contradict those of RL360° technical marketing manager Neil Chadwick, who said that trusts would not be affected by the proposals.
“I do not think it will make trusts a less attractive option,” he said. “The only issue that will arise is that people will have to be careful not to use the wrong structures.”
He also said he believed HMRC felt a need to be overly cautious with the proposals: “[HMRC] are of the opinion that trusts have been subjected to widespread abuse, when in reality they probably haven’t.
“With all these things, if there is any wind of widespread tax avoidance [HMRC] come down on it especially heavily. They have to be seen to be doing something.”