The Chancellor Launches His Attack On Your Estate

06 April 2006

In his Budget last month, the Chancellor tried to make it more difficult for tax payers to avoid paying Inheritance Tax. No surprise there. No surprise either in tactics adopted. It is now clear that the Chancellor likes to introduce taxes which have retrospective effect and which are designed to foster a climate of confusion and uncertainty. This is not accidental, it is by design – and it works. If we, as tax payers, are uncertain of the outcome of any tax planning arrangement then the chances are we shall be reluctant to take any action at all. Inaction inevitably results in more tax being paid. Specifically, failure to make a tax efficient Will can lead to an additional £114,000 being paid on the death of the survivor of a married couple.

In the Budget, the Chancellor focused his attack on Trusts. Much to the annoyance of successive sovereigns and governments over the past 800 years or so, Trusts have developed into a highly sophisticated tool for preserving family wealth. What this government fails steadfastly to understand, however, is that the vast majority of trusts are not set up for tax avoidance purposes but for multifarious other reasons such as for the protection of those who are ill-qualified in managing financial affairs whether for reasons of youth, mental infirmity or otherwise. It is more illogical, therefore, that this attack should be launched against those members of the society who are most vulnerable.

If you die, do you really want your 16 year old son (or grandson) to inherit your estate (which might be of sizeable sum) at the age of 18? Would you not prefer to postpone his inheritance until he attains the age of 25? If your daughter is going through a divorce, do you want her to inherit a share of your estate only for half of it to be awarded by a divorce court to her ex-husband? The answer to each of these questions is probably “no” so in your Will, you direct that at least part of your estate is to be retained by your Executors and Trustees on Trust. If you are in a second marriage and you want to leave your Partner your estate to have the benefit of it until they die, but wish to make sure that the children of your first marriage inherit on your partner’s death, you leave your estate in Trust. These are not tax planning reasons for setting up Trusts, they are perfectly sensible estate planning reasons and the Chancellor has no moral right to tax people because they have the temerity to want to order their affairs in a sensible fashion.

The attack by the Chancellor is not only irrational, it is also vindictive. It is vindictive because it is retrospective and leaves us now with a period of doubt and confusion for at least 4 months until The Finance Act finally receives Royal Assent.

Every Trust or Will that has been made should now be reviewed for its tax efficiency or, rather, for its tax inefficiency under the new regime. It may or may not need to be adjusted once the new rules are known but in the meantime, we live in a twilight zone of uncertainty. So far as existing Trusts are concerned there will, it seems, be a 2 year period within which steps may be taken (if the Trust Deed permits) to change the terms of the Trust to avoid or mitigate the new tax liability. However, it will not be possible to take any steps until the new tax law is known with greater certainty.

So far as Wills are concerned it is of the utmost importance to monitor the position over the coming months to establish precisely how the changes might affect our Wills. Quite a lot is now at stake. It is important to make sure that your Will is correctly drawn to take into account the proposed changes. A tax efficient Will can save you £114,000 but a tax inefficient Will, with the potential loss of spouse exemption, could cost you a lot more than that. Inactivity really is not an option.

Over the next few months as more information becomes available we will keep visitors to our website updated by email as it becomes clearer what is happening to the tax law.

For more information please contact Harvey Barrett, Partner.
 

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