Trusts and estate planning trustees new powers to appoint agents, nominees and custodians; to insure trust property; and to pay Inheritance tax professional trustees. The new powers apply only to The current government have given no sign that the extent that there are no contrary provisions in they intend to implement the reform of inheritance the trust instrument; otherwise they apply to existing tax promised while in opposition. And with trusts as well as those created after the Act came inheritance tax receipts rising steadily, why should into force. they? When Labour came in to power the yield from inheritance tax was ?1.558bn. In 2000/2001 the A modern framework for trustee investment projected yield is ?2.3bn - a 10% pa compound Trustees now have a modern framework for the increase over the four tax years. Although investment of trust assets, compatible with current inheritance tax is often referred to as an avoidable trading and settlement rules for stocks and shares, tax affecting only a small number of estates, it is computerised clearing systems and the employment clear that a significant number of clients are failing to of discretionary fund managers. The sweeping implement planning strategies. With the anticipated away of the restrictions of the Trustee Investment growth in personal wealth and inheritances, the Act 1961 is especially welcomed. Although upward trend in the inheritance tax take is likely to ‘investment’ is not defined in the Act, there is an continue unless more clients are persuaded to give underlying assumption that investment includes serious consideration to making full use of available investment for capital growth as well as income. reliefs and exemptions. Subject to the general rules of suitability and diversification it should become possible to make The future wider use, in older trusts, statutory trusts and home-It seems unlikely that the next, pre-election, Budget made wills lacking a wide investment power, of non-will include anything that would risk upsetting 'middle income-producing assets such as life insurance England'. However, we could expect that any future single premium investment bonds. The range of Labour government would eventually implement risk-graded, smoothed yield with-profits funds and some reform of inheritance tax. In the meantime, it specialised investment funds available under such should be remembered that there has been no bonds will be particularly suitable for many trustees. hesitation in introducing targeted anti-avoidance And there will often be a consequent saving in trust measures if the government are persuaded that administration time where the trust fund is invested planning schemes result in 'tax leakage'. There is in life insurance products, as they are non-income-still an urgent need to take advantage of the producing assets. planning opportunities inherent in the current inheritance tax regime while they remain. Summary ? the restrictions of the Trustee Investment Act Current opportunities 1961 are swept away An analysis by the Inland Revenue in 1996/97 ? but ‘suitability’ is still an important issue; where shows that nearly half of the total gross capital value the beneficial interest is purely an income interest of estates is accounted for by cash deposits (25.2%) and the trustees have no discretionary power and investments. Insurance policies alone over income or capital, insurance contracts are accounted for 5.7%. What an amazing opportunity unlikely to be appropriate for inheritance tax planning! ? trustees will need to comply with the new duty of care,
Trustee Act 2000 ? and take proper advice.
The Trustee Act came into full force on 1 February
Following the change to the taxation of distributed 2001 for England and Wales. As well as widening
dividend income of discretionary and accumulation the range of investments available to trustees
and maintenance trusts, there is a growing lacking specific investment powers, there is a new
awareness of the advantages of investment bonds statutory duty of care on trustees and a requirement
as trust assets. An Independent Financial Adviser that they consider obtaining proper advice about
can help, both by being able to recommend non-investment.
income-producing assets, and as a person to whom
discretionary investment powers are delegated. Main changes
The main change is the creation of a new wider
All existing trusts should be reviewed, and trustees statutory power of investment to replace the limited
should re-examine their actions and investment and restrictive power under the Trustee Investment
policies to ensure they comply with the Trustee Act. Act 1961. This new power is supported by granting
Accumulation and maintenance An accumulation and maintenance settlement is trusts in 2001 most likely to fall foul of the common grandparent
condition if, at the time the settlement was created, it Accumulation and maintenance trusts enjoy a was intended to provide for unborn grandchildren. special tax status in that during the accumulation period they are discretionary trusts but are not For example: subject to the discretionary trust tax regime.
In 1976 Henry was a wealthy individual with However, this special status lasts for 25 years only two married children. He hoped to become a unless: grandfather and wanted to set some money ? all the beneficiaries are grandchildren of a aside for the education of his future common grandparent (i.e. of the same generation) grandchildren. On 1 December 1976 he ? all the beneficiaries are children, widows or created an accumulation and maintenance widowers of grandchildren who have died before settlement for his niece and his unborn becoming entitled grandchildren at age 25 with no right to income ? (exceptionally) the trust was created before 15 at age 18. Grandchildren were born in 1987 April 1976, the trustees had no power to bring in and 1990. the common grandparent condition and the trusts have not been varied since 15 April 1976. If the 25-year time limit is allowed to run out on
1 December 2001 a tax charge arises. If a trust ceases to be an accumulation and Suppose the value of the trust fund at that maintenance trust because there is no common date is ?250,000. The tax charge is then grandparent and the 25-year period has run out, ?52,500. However, if the grandchildren are then there is a charge to tax at 21% unless all the given interests in possession before 1 trust property has been distributed or the December 2001, the tax charge is nil. beneficiaries obtain interests in possession.
It is therefore important to review all accumulation The 21% rate is arrived at by taking: and maintenance trusts as they approach 25 years 0.25% for each of the first forty quarters (10%) in being if the common grandparent provision does 0.20% for each of the next forty quarters (8%) not apply. These accumulation and maintenance 0.15% for each of the next twenty quarters (3%) trusts should be terminated by appointing absolute
interests or interests in possession to the Thereafter the normal rules for ten-yearly and beneficiaries. proportionate charges for discretionary trusts apply to these settlements. There are capital gains tax implications if the trust
holds chargeable assets but this will not, of course, The accumulation and maintenance regime came be an issue where the trust fund comprises purely into being on 15 April 1976 and the 25-year period life insurance policies. could therefore run out from 15 April 2001 onwards.
Every care has been taken to ensure that the information given in this document is correct and in accordance with
our understanding of current law and Inland Revenue practice. The law and Inland Revenue practice are subject
to change.
February 2001