Now we’re in the second half of January, and new excitement has happened over the big stretch of water just west of Ireland, where there’s a new sheriff in town, it’s easy to forget that it isn’t that long ago that we had ourselves a modest change of political direction over here (200 days as at the point of writing this – bizarrely there’s a website called ‘days.to’ which tells me this).
When Labour got into power there was a general expectation of tax rises, especially following the incredibly deep £22bn hole (I’d have thought virtually invisible in amongst the approximately £3,500,000,000,000 of debt they inherited, but finance is a funny thing) that was identified as the voting tally was announced. A more cynical observer might think that was politicised to make what came next more palatable.
Regardless of motivation – the budget itself was never going to be a happy event. If you’re going to try and cut the gordian knot of paying off a debt about the same size as the economy, without raising direct taxes, then you’re going to be attacking the fringes.
If you read some of the press, companies have already gone to the wall struggling to pay employer NI increases that don’t come in for another 3 months – but it will definitely be a painful year or two for many, and that’s with tax rises moderated by some clever reorganisation of the Government balance sheet to make the debt look smaller.
One area that was widely expected to come under pressure, was inheritance tax generally, and inheritance tax planning specifically. Whilst it’s true that pensions will be coming into the inheritance tax regime, other changes in this area were more muted. There were rumours that we might see the end of Business Relief – the 100% reduction in inheritance tax for the long-term owners of qualifying unlisted businesses, designed to allow family businesses to continue through the generations. With relatively few multi-generational businesses still in existence, it is perhaps not quite as clear why this relief exists at all, but it is extremely useful from a planning perspective, and it escaping the chop was a relief, albeit not unscathed, as we now have a limit of £1m per person.
Another area which was perhaps expected to come under more pressure than it did (and is my topic for today) was trust planning. Trusts are entities that are not people, or companies, but can own property and conduct transactions as if they were. They evolved in the UK as a result of the need to appoint a guardian or land manager to look after farmed lands while crusaders were in the middle east but became vehicles to more generally allow the owner of an asset to maintain some element of control after gifting it away.
Unlike people, trusts don’t die of old age, and some are over 300 years old, although since 2010 the maximum term is 125 years. Consequently, legislation has been enacted to ensure that they are not used to nullify inheritance tax – but used carefully they are considered by some to be a useful component in the arsenal of inheritance tax planning tools.
The rules around trusts have steady tightened over the years, with all trusts now required to be registered with the Trust Registration Service (TRS), and to have a formal relationship with HMRC (although if no tax is due, HMRC will stop asking for an annual tax return). They now require a Legal Entity Identifier (LEI) before making certain types of investment and are looked on with suspicion by HMRC, many planners now consider them more trouble than they are worth.
However, where you might wish to plan for your estate on your demise, or perhaps more critically, where you have a dependent who cannot look after themselves, a trust, with well chosen trustees acting on behalf of the beneficiaries can be an essential tool to achieve your goals.
Where trusts are perhaps most useful, is when paired with assets that don’t impose a tax reporting obligation. One such asset is the life insurance investment bond. Since around 1998 CGT has for most people been cheaper than income tax, and the investment bond fell into disregard. It was an old fashioned, anachronistic product, analogous to ‘with profits’ and PEPs. However, with CGT being set at 24% for higher rate taxpayers in the budget, there is a use case for them once again.
When placed into a trust, they also simplify the reporting, as no income is produced, and changes of investment within the bond do not give rise to tax consequences outside the bond – only on some form of withdrawal might there be an obligation to report.
Trusts are complex, and they impose obligations that direct ownership does not, and do not guarantee you will get the outcome you want – but they also represent an opportunity to plan for your family’s future that might not be possible outside this environment. We think they’re an essential element of the modern adviser’s toolkit, just as much today, as they were 30 years ago.
