The decennial charge regime (combined with the entry charge) is broadly equivalent to a full 40 per cent tax charge over 30 years or a generation. Nonetheless the rate of these IHT charges could be increased in the Budget.
In deciding whether to use a trust, it is important to remember that the IHT is not eliminated but rather changed and removed from the individual and imposed on the trustees.
The difference is really that the trust charge is spread out and the timing is known, whereas IHT for individuals is a lump sum, and the timing is not known.
Trusts pay income tax and CGT at the top rates on the funds they receive.
The income tax paid can be passed on to beneficiaries by way of a tax credit on income distributions paid to them.
The amount received should be declared on the beneficiary’s tax return and, if they are not a 45 per cent income taxpayer, they may be due a refund from HMRC.
Distribution planning to ensure the most efficient use of the tax paid is an important part of the running of the trust – especially, for example, where trusts are set up to fund grandchildren.
Coming back to the rule change on VAT being charged on private school fees from January 1 2025, school fees planning may become even more important.
An IHT advantage
Away from income tax there are presently some ways in which a trust can secure an existing IHT advantage.
Settling the shares of a family company before a sale, for example, might preserve the effects of the existing business property relief (BPR). This opportunity is a function of the way in which the entry charge is calculated.
If an individual had died owning shares that qualified for BPR there would be no IHT.
Similarly, if the individual gives qualifying shares to a trust during his lifetime there is no IHT applicable at that time.
There are numerous technicalities in this area and some ways in which the BPR can be clawed back, but this is the essence of it.
The IHT payable at the creation of the trust then forms the basis for the subsequent decennial charges, so there can be an ongoing benefit.
Much of the conversation around budget changes is focused on offshore trusts.
At present, trusts created by a non-domiciled person are outside the scope of IHT even if they themselves retain a benefit, and it is no great surprise that the government’s intention is to eliminate that tax advantage.
The concern is that there will be a narrow UK-centred view responding to headlines resulting in heavy-handed and inappropriate tax charges.
In many countries – one frequent example is the US – trusts are a routine part of family financial management and little to do with tax.
