It may have escaped the attention of trust and estate practitioners but we have spotted a rather worrying change to the qualifying conditions for bereaved minors' trusts and 18-25 trusts in Schedule 1 to Finance Bill 2013.
For "property transferred into settlement on or after 8 April 2013" the statutory power of advancement in s32 Trustee Act 1925 (or an equivalent express power) will have to be excluded or restricted or else the trust will not qualify as a BMT or 18-25 trust. This is because FB 2013 is removing the 'power of advancement disregard' that was written into sections 71A and 71D of the Inheritance Tax Act 1984 as a result of extensive consultation by the government in 2006.
It seems rather odd that the provision is being removed because there is currently no objection to the existence powers of advancement in the current rules and the basic condition as to the application of trust capital is not changing. That condition states that "if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of the bereaved minor (or 'B' in the 18-25 trust legislation)". It is implicit that a power of advancement can only be exercised for the benefit of the vulnerable beneficiaries concerned and so we are not sure what the problem is.
There also seems to be an apparent inconsistency between bereaved minors' trusts arising as a result of intestacy and those which arise under a Will. The statutory power of advancement applies to the statutory trusts for issue on an intestacy and this will not prevent those trusts from qualifying as 'BMTs' but if the power applies to equivalent trusts written into Wills, it will prevent those trusts from qualifying as BMTs and they will presumably be subject to the inheritance tax relevant property regime for trusts. Does this mean bereaved minors will potentially be in a worse position if their parents went to the trouble of making a Will (and forgot to restrict s32 or made it at a time when s32 was not a problem) than if they had failed to do so and died intestate?
To the extent that these changes are needed, we believe the intention is that they are only supposed to affect trusts arising after 8 April 2013. However, the grandfathering provisions in paragraph 7 Schedule 1 to FB 2013 are not worded so as to cater for trusts made by Will. This is a little odd since s71A and 71D trusts are specifically intended to be created by Will!
The problem is that Wills that have been made before 8 April 2013 and which contain trusts for the testator's children to take say at age 18 or 21 or 25, will almost always include either the statutory or an express power of advancement (so as to enable the trust property to be advanced to pay school fees for example or to enable the children to benefit in some other way). Those Wills do not technically come into operation (and so the trusts are not "created") until the testator dies and if this occurs after 8 April 2013, the settlement will not be within the current grandfathering provisions. It surely cannot be the intention that we have to ask clients to re-write their Wills and change all our precedents again?
We have reported our concerns to HMRC and hope that they will reconsider the merits of removing the power of advancement disregard.