The full extent of how new inheritance tax rules for trusts will hit estate planning for families has been revealed by a legal expert.
HM Revenue & Customs (HMRC) wants to change the rules so anyone with multiple trusts gets just a single nil rate £325,000 inheritance tax band.
Currently, married couples can shelter £650,000 every seven years in trusts, which places the cash or assets outside of their estate for inheritance tax purposes.
Over 35 years, they can amass trusts worth £3.25 million which pay no inheritance tax.
HMRC says this is an injustice to individuals who only have a single nil rate band and who must pay inheritance tax at 40% on the balance of their estate.
“This measure will cost middle-earners a lot of tax but will leave those who can afford estate planning advice and the wealth largely unaffected,” said Emma Chamberlain, a barrister specialising in trust taxation.
She also explained the proposal will generate more reporting for estates and financial firms – especially where life insurance policies are placed in trust.
The new rules are expected to apply to trusts started from June 6, 2014.
The Association of British Insurers (ABI) has declined to comment the impact the new trust rules will have on the insurance industry until the consultation is finalised at the end of the month.
“Many objections have repeated that the new rules unfairly penalise estate planning opportunities open to everyone and that have been generally acceptable to HMRC, “said an HMRC spokesman.
“One of the problems the new rules address is that of so-called pilot trusts that are set up in advance and have cash or assets put into them in later years deliberately to avoid inheritance tax.”
Disproportionate tax burden
The spokesman also explained the new rules would apply consistent inheritance tax treatment of estates to everyone.
However, Chamberlain and other tax experts claim the rules will target middle earners who do not have the resources to take expensive estate planning advice.
They say those with estates worth up to £2 million will still pay a disproportionate amount of inheritance tax.
“They cannot afford the advice to mitigate tax on their estates, so end up paying more inheritance tax than the wealthy, while those with low value estates pay nothing,” said Chamberlain.
HMRC figures show that estates between £1 million and £2 million paid 69% of the £3.4 billion inheritance tax collected in 2011-12.