Interesting tax question

So, trusts pay inheritance tax (equivalent of at least) of 6% every 10 years. Would this apply to the Grosvenor trusts?

If so then….

17 thoughts on “Interesting tax question”

  1. Well, in the same way that trading assets and shares in personal trading companies (I’m short-handing here) are excluded from IHT so they are excluded from the computation of the 10 year charge.

    So to the extent that the Trust holds business assets then no 10 year charge applies.

    The exclusion of business assets from IHT makes sense (although I have ‘debated’ with Murphy over this). If a business worth a couple of million were in an estate where IHT was due it might mean the business had to be sold to meet the tax. Clearly absurd although the Murphamoron’s answer was that 40% of the business should be given to it’s employees.

  2. Actually, the calculation of the 10 year charge is horribly complicated and for various reasons rarely works out at 6%.

    The charge is worked out by deducting the IHT Threshold at the anniversary date from the value of the trust property (plus any previous lifetime transfers in the seven years before the start date and any capital withdrawals from the trust). If this amount is greater than zero, the lifetime rate of 20% is applied to it. However, at this point, a separate calculation may have to be done in respect of previous lifetime transfers and previous capital withdrawals (these are added together and the nil-rate band is subtracted from the total. Tax at the lifetime rate is applied to any amount over zero.) Any tax due on this amount is subtracted from the first calculation, and the actual tax paid is 30% (3/10ths) of this amount.

    That’s why 6% has entered mythology (30% of 20%) but that ignores the effect that the nil rate band has.

    I hate doing the calcs when they are needed and (to paraphrase Kevin Kegan) I would love it, LOVE IT to watch tax “expert” Murphy attempt such a calculation…….

  3. I wonder: Would the cost of accountancy and financial planning services come down if IHT was set at the correct level?

  4. I lost track of all the changes – can you still have multiple trusts, each having its own £325,000 nil rate band?

    Although if the total value is £9 billion, as reported, that would need nearly 30,000 trusts to cover it. But at one trust a day (if you did more than one on the same day the scheme didn’t work) it would have taken 75 years to set up, so there probably aren’t enough to make a significant dent in it.

  5. It is one I am not sure of, but maybe applies only to trusts created after the legislation was enacted.

  6. Presumably the trusts get not only Business Property Relief but also Agricultural Property Relief. It seems to me that the case for the former is stronger than the case for the latter.

  7. “That’s why 6% has entered mythology (30% of 20%) but that ignores the effect that the nil rate band has”: but surely the NRB has a vanishingly small effect on a large trust?

  8. When were these trusts set up? Presumably so long ago that their life will only be 80 years?

    (Except in Scotland, obviously.)

  9. Hasn’t there been research done recently thay shows IHT actually INCREASES he concentration of inherited wealth?

    After taking time to get my head around it, this would make sense. Estate planning is to a much greater extent than sensible governed by the imperative to avoid estate duties/ transfer taxes. Invariably that causes the assets to be routed into a smaller number of specifically designed financial vehicles rather than being spread. Would others agree with this?

  10. Ironman, I think I did read something like that, but it wasn’t comparing inheritance tax to no inheritance tax, it was comparing the typical continental system, which is a genuine inheritance tax, to the UK system, which is really death duties.

    The UK system just has one nil rate band for the estate, but the continental systems generally have an exempt amount for each recipient, so the more people they spread it between, the lower the tax is.

    That said, it’s also possible that the UK inheritance tax concentrates inherited wealth more than not having an inheritance tax at all, but I think it would be because generally only the wealthiest engage in proper tax planning. So those of middling wealth get taxed (usually because the main asset is the house, which is difficult to avoid inheritance tax on), and have less to pass on, but the wealthiest avoid it.

  11. Dearime, the traditional way of getting round the time limit on trusts was to resettle every generation.

    So the estate is in trust, current life beneficiary is Albert, then on his death it goes to his son Bertie for life, then to Bertie’s son Charlie on Bertie’s death.

    Albert dies, the family lawyer gets Bertie and Charlie together, and they agree to amend the trust so that Charlie also only has a life interest and on Charlie’s death it goes to his son (who may or may not actually exist yet).

    This is possible so long as all the beneficiaries agree (i.e. Bertie and Charlie).

    In return for his agreement, Charlie is offered a regular income from the trust. So Charlie agrees because otherwise he’s got nothing until his father dies, and he needs the money (his tailor is refusing to make him another waistcoat until he’s paid for the last six, and his club are threatening to expel him over unpaid gambling debts).

    Don’t know if it’s still done like that.

  12. I can see a case for replacing Inheritance Tax with a general gift tax (which would include inheritances) that would subject gifts to CGT (spousal exemption to continue).

    The equivalent of BPR might be some sort of arrangement that allowed the CGT bill to be paid off over a decade rather than in one lump.

    Of course that would mean that quite a lot of bequests would be hit with up to 28% tax rather than the present 0% if the estate is small enough. Still, we’re all in this together so it’s only right and proper that the workers and lower middle classes stump up too. Innit?

    No APR.

  13. dearime, they generally relied on the alternative to the 80 year rule, which I think was life plus 21 years (i.e. in my example to allow Charlie’s future son to be born and become an adult). But yes, it re-started that clock.

  14. I wonder: Would the cost of accountancy and financial planning services come down if IHT was set at the correct level?

    Yes, considering that the correct level is zero.

  15. Yes, considering that the correct level is zero.

    And is in civilised countries that don’t punish you after death for saving up for your retirement and family!

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