The Autumn 2017 Budget included a number of announcements concerning estate planning. There were the usual rises in the capital gains tax and income tax allowances, and the welcome stamp duty land tax relief. There were also a couple of issues which are worth reviewing now.
1. Review of trust taxation
The government announced it will review taxation of trusts in 2018 and consult on how to make them “simpler, fairer and more transparent”. What will this mean in practice and how it will apply to UK and offshore trusts?
Currently when a person (known as the settlor) creates a trust, the trustees hold the trust assets for the benefit of the beneficiaries. Tax may be due from the trustees (who are usually liable for the tax during the trust’s lifetime, although they pay it from the trust fund), the settlor or the beneficiaries.
These are the taxes that currently apply to trusts:
- Inheritance tax (IHT), which applies in different ways to different types of trust.
- Capital gains tax, payable by trustees on chargeable gains arising within a trust and, sometimes, when assets are transferred out of the trust.
- Income tax, charged on income from trust assets, such as dividends from shares and rent from property.
- Stamp duty land tax (SDLT), which is normally only payable on sales and not on gifts to trusts or distributions to beneficiaries. However, if a settlor gives a property with a mortgage to trustees, the amount of the outstanding loan is subject to SDLT. The additional 3% SDLT charge applies to most trusts.
- VAT, which may be payable if the trustees run a business.
Although it’s uncertain what tax changes the government will propose or when they’d take effect, it’s worth ensuring your trusts are currently optimised for tax-efficiency, and we’ll be happy to review them with you.
2. Are agricultural and business property reliefs at threat?
HMRC has published a paper on the influence of IHT reliefs and exemptions on estate planning, with a particular focus on agricultural and business assets. The research found that for most people, the key objective is keeping assets in the family and avoiding having to break them up on death; saving IHT was a secondary concern. People rarely purchase agricultural or business assets with the sole aim of minimising IHT. In fact, most people who inherit such assets usually keep them.
There have been longstanding rumours that agricultural property relief (APR) and business property relief (BPR) will be restricted. At the moment, it’s not clear if the government will go ahead with these changes. However, now could be a good time to organise your lifetime estate planning and gifts, whilst the reliefs are still available and not restricted in value.
If you hold assets that might qualify for APR or BPR on your death, ideally your Will should include provision for giving those assets to a non-exempt beneficiary, such as your children, grandchildren or a trust (rather than to your spouse). This will ensure you don’t lose the relief.
Although APR or BPR would not be lost if your spouse also qualifies for the relief on their death, there’s a significant risk the relief would no longer be available when they die, or the rates of relief may have changed. You would have potentially lost the opportunity to pass on agricultural or business assets to the next generation, free of IHT.
If your spouse might need the agricultural or business assets after your death or if it wouldn’t be appropriate to give those assets to your children or other descendants outright, it may be best to give them to a discretionary trust (established in your Will). You can include your spouse as one of the potential beneficiaries, so they can benefit from the capital and income if they want (subject to the trustees’ discretion).
If APR/BPR continues to be available, you can keep the assets in the trust and avoid ongoing IHT charges, and the trustees can give it to your children (or other beneficiaries) as and when they decide it’s sensible. If APR/BPR is no longer available, the trustees can give the assets to your spouse within two years, using the spouse exemption to save IHT.