Budget imposes "stealth tax" on trusts and estates

28 June 2010

The Emergency Budget's new 28 per cent top rate of capital gains tax will definitely apply to all trustees and personal representatives of deceased persons.

Some confusion had arisen because a budget summary on the Direct Gov website suggested the top rate of CGT would only apply to discretionary trusts that are taxed at the higher rate.

Estates have never previously paid the higher rate of CGT. But the Treasury document BN20, issued along with the Emergency Budget, makes clear that the 28 per cent rate applies to all trusts irrespective of the beneficiaries' income tax bracket: "For individuals, the rate of CGT remains 18 per cent where total taxable gains and income are less than the upper limit of the income tax basic rate band ...

For trustees and personal representatives of deceased persons, the rate is increased to 28 per cent (previously 18 per cent)."

The tax applies to any gains made while an estate is being administered and for the duration of a trust. The only exception is where the trust or estate is eligible for entrepreneurs' relief, in which case the CGT rate will be 10 per cent up to a maximum capital gain of GBP5 million.

The Law Society has protested that the move may penalise will trusts created by parents for their children if they are orphaned while still minors.

"Personal representatives, trustees and anyone else appointed to set up a trust and settle assets within it should urgently seek advice from their solicitor in the light of these new developments", Law Society President Robert Heslett.

Heslett urged trustees and PRs to ensure that arrangements for vulnerable beneficiaries are structured as tax efficiently as possible, but also warned them to "tread carefully" when reviewing trusts or practices in light of the new CGT rate.

Some 200,000 family trusts could be affected by the new tax, which was introduced without any consultation or warning.

The Treasury appears to have assumed that all trust beneficiaries are higher rate taxpayers. The Telegraph quotes Mike Warburton of accountancy firm Grant Thornton as saying that "once again trusts have been singled out for unfair treatment, when they are a legitimate and useful tool for families, many of which are on modest incomes."

These measures come as the coalition government has reiterated its declared policy of fully transparent and consultative policy-making on tax law.

 

Sources

Treasury budget note 20

Law Society

Law Gazette

Daily Telegraph

Money Marketing

FT Adviser

Fund Strategy


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