Could UK Inheritance Tax Make The Elderly Move Abroad?
We recently informed you about changes to Inheritance Tax rules. We have now uncovered fears that elderly people could be driven overseas by a Government clampdown on the use of trusts to prevent their assets being swallowed up by inheritance tax.
The Institute of Economic Affairs said plans to change the rules on how much tax is charged amounted to “just another punitive step” against those who hoped to be able to pass on wealth they have built up to the next generation.
Tax experts warn this could make it easier for young people to spend their parents’ or grandparents’ wealth by giving them access to large sums of cash before they are old enough to handle the responsibility.
The warnings follow the announcement of new rules by HM Revenue & Customs preventing people reducing their exposure to inheritance tax by setting up multiple trusts for their heirs, each with a £325,000 tax free allowance.
Under the plans, which could come into force next year, they would have only one £325,000 allowance, which could be divided between several trusts.
A recent consultation paper also warns that both the person setting up the trusts and their trustees could face penalties if they miscalculated the tax-free allowance.
“The Government wants to ensure that there is consistency of treatment between those individuals who transfer their assets on death and those individuals who make lifetime transfers through the use of trusts,” the document says.
“In the circumstances we believe that it is right that there should be one nil-rate band available for those individuals settling property into trust just as there is only one nil-rate band available to an individual transferring assets on death.”
But Mark Littlewood, director general of the Institute of Economic Affairs, said: “This move will simply mean more families are dragged into paying Inheritance Tax.
“It is already a fiddly tax, yielding little revenue and with high collection costs.
“Large numbers of people of modest means have been swept into the net because of the rapid rise in house prices compared with the much smaller increases in the inheritance tax threshold, so limiting the number of trusts people can have is just another punitive step that could drive some to relocate overseas.”
Gary Heynes, a tax partner at Baker Tilly, said the changes would be “another nail in the coffin” for trusts.
Amid increasing curbs on the use of trusts, some families would choose to set up companies to hold their investments while others would place them in offshore bonds.
“The Government has assumed that trusts have just been used for tax avoidance but actually it isn’t often done just for tax avoidance,” he said.
“The worry is that if trusts are not used, assets are going directly to those who may be too young to handle wealth responsibly and those who have built up wealth through hard work will be frustrated that a system which has worked well for hundreds of years to protect that value will no longer be available to them without a large tax cost.”
Rory Meakin, head of tax policy at the taxpayers’ Alliance, said: “I would be surprised if there wasn’t an unintended consequence to all of this.”
But he said the existence of inheritance tax itself had distorted the original intention of trusts.
“Our policy is to abolish inheritance tax entirely. There are legitimate reasons for trusts but some of the reasons why trusts exist are just to get around this [tax].
“It would be nice to have trusts return to their original purpose of ensuring that bequests are used in the way that the people who made them wanted them to used.”
If you have any questions or concerns about Inheritance Tax please call Vincent & Co for a discussion.