Despite Prime Minister David Cameron’s pledge to extend the inheritance tax threshold to a £1 million to help hard working people hang on to their wealth, proposals for a new trusts tax avoidance law may punish the wealthy.
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Industry experts warn the shake-up of how much inheritance tax trusts have to pay goes against the grain of helping middle income families pass their wealth on to future generations.
HM Revenue & Customs (HMRC) has published proposed new rules that stop families passing on their assets without tax by setting up multiple trusts for their loved ones.
The rules do away with the £350,000 nil-rate inheritance tax band for each trust. Instead, each trust must share a single nil-rate band.
The new law is expected to start from April 2015.
Consistent tax rules
HMRC also included hefty fines and penalties for trustees and individuals who breach the inheritance tax threshold.
The government is trying to level the playing field for individuals and trusts,” said an HMRC spokesman. “It seems unfair that an individual has just one tax-free inheritance tax allowance when someone can set up a number of trusts and extend their tax-free threshold much further.
“The new proposals aim to apply the rules consistently for everyone, so whether the estate passes through a trust or directly between individuals, they both pay the same amount of tax.”
Tax experts consider the new rules would just bring more people into the inheritance tax net – and put more money in Treasury coffers.
Think-tank the Institute of Economic Affairs is concerned the intention is ‘punitive’ and that heirs will get and possibly spend their inheritances early.
Mark Littlewood, of the Institute of Economic Affairs, said: “Inheritance tax is already complicated, does not give the government much revenue and is expensive to manage and collect.
“Many middle income families are set to pay this tax simply because the cost of their houses has risen over the years and not because they are particularly wealthy. Limiting the tax trusts pay is likely to force some of these people to sell up and move overseas to a more benign tax jurisdiction.”
However, some tax experts have contrary argument and support the proposed changes.
Rory Meakin, head of tax policy at the Taxpayers’ Alliance said: “We want to see the government abolish inheritance tax. Some taxpayers may have a personal reason for setting up a trust, but most are formed simply to try and avoid this tax.”
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