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Trust me I’m an agent

27th Mar 2013
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One of the reforms to the tax system in recent years has been to render the use of trusts for tax purposes largely pointless if not actually disadvantageous, explains Simon Sweetman.

At which most of us might breathe a sigh of relief. But the way the law has changed over recent years means there are lots of spring guns and man traps out there still. There is I suppose some irony that the French have decided to recognise trusts now we don’t want them any more (though they still have non-tax uses, of course).

Dealing with trusts was never straightforward. You tended to bump into them somewhere in the family paperwork. You probably weren’t there when they were set up, and you couldn’t really tell why. Nobody could remember, but had been advised by the family solicitor (long dead) or by that IFA who turned up one day and went away again shortly afterwards having changed his employer three times in the process. Or, worst of all, a bank manager who (like all bank managers) has now disappeared. Or they read about it in the financial advice column in the Sunday paper, which told them it was all quite simple. In the meantime nobody has bothered to replace a professional trustee, nobody has done any accounts and (for a discretionary trust) certainly nobody had attempted any 10-year IHT returns. Or any income tax returns.

Mind you, even with a solicitor acting you might get the IHT done right but compliance with other taxes could be ropey.

A whole set of potential problems have been set up in recent years by the popularity of the nil-rate band discretionary trust, until it became pointless with the transferability of the nil-rate band between couples. But every will written over a substantial period has one of these lurking in it somewhere, and in many cases nobody will understand why.

Now all you need to do is whistle it away with a deed of family arrangement (if you can persuade everyone to agree and not think they’re being plotted against). If not (or if there’s nobody to explain this) it just gets left there confusing everybody, and you stumble over it when you are asked to advise much later on.

Often now these old trusts are horribly messy: the combination of IHT and CGT with discretionary trusts in particular can confuse most people. And they’re old as well. You haven’t got enough trustees (or if you have they’re the wrong people) and if you’re lucky somebody hasn’t done something completely ultra vires. I saw one the other day with some little old seaside cottages in it… but in the part of Suffolk that everybody wants to holiday in now, they’d gone up from £30,000 to £200,000 in fairly short order, making a managed exit almost impossible.

When it comes to tax avoidance, nobody seems to think about who is going to pick up the pieces afterwards. That seems especially true for the kind of semi-professional tax planning that has bewitched the middle classes in recent years. Yes, it is income, but the thought of all that effort deployed to no good purpose is painful.

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