Budget forces wary insurers to shelve trusts
By John Greenwood (Filed: 29/03/2006)
 

Brown's surprise prompts withdrawal as providers await details of Treasury's proposals on IHT plans

Britain's biggest insurers have pulled the plug on trust plans following the Treasury's sudden clampdown on products that the wealthy use to avoid inheritance tax.

Standard Life, Clerical Medical, Scottish Equitable and Axa have withdrawn trusts amid fears that thousands of their customers could fall foul of new tax rules unveiled in last week's Budget.

Clerical Medical warned that setting up new arrangements was too risky until the Government had published more details of its controversial plan to tax wealth protection plans for the rich. Experts have described the chancellor's proposals as the most sweeping changes to trust law in a generation.

The Treasury confirmed that around 20,000 wealthy individuals would be affected by Gordon Brown's shock move. They will include the Duke of Westminster, the billionaire who has a significant part of his wealth in trusts.

It is understood that even HM Revenue & Customs was kept in the dark about the extent of the proposals, which had not been trailed in industry circles before the Budget.

Standard Life has suspended the processing of all flexible trust loan and gift plans, access and option plans and discounted gift plans pending clarification of the extent of the new rules, which are set to take effect in April 2008. Scottish Equitable said no new plans would be set up until the Treasury had published the Finance Bill, expected within the next six weeks.

Clerical Medical said the new rules marked a fundamental change in the way trusts used by the middle classes are treated, requiring hundreds of thousands of plan holders to file tax returns even if they have no tax to pay because the assets in the trust are below the inheritance tax threshold.

Chris Brum, Clerical Medical's tax and financial planning manager, said: "Middle England may not be stung for tax but they will be forced to undertake complex and expensive administrative duties, making trusts less attractive."

Colin Jelley, the marketing development manager at Skandia, said: "These sorts of trust are there to protect family assets from the excesses of profligate individuals. For some trusts there is a real possibility that tax levies could lead to sale of property in the long term."

Lawyers and accountants who advise the landed gentry have predicted that the new tax rules could force country estates to be broken up if trusts are forced to sell assets to pay a new 6 per cent tax, payable every 10 years. The new law also provides for a 20 per cent tax to be levied on assets above £275,000 going into and out of the trusts.

Jane Sanders, a spokeswoman for the Duke of Westminster, said: "Some elements of the Grosvenor trust which holds the Duke's property will be affected by the Budget changes. There is no doubt these changes do put a greater tax burden on anybody who owns property through these trusts, which have been set up not to avoid tax but to look after the countryside and pass land from one generation to the next."

Dawn Primarolo, the paymaster general, said: "To be affected by the new measure, an individual would have to have placed assets into a trust, excluding their home and over and above any savings that they would need access to, in excess of £275,000, and be seeking to avoid IHT. Such individuals make up only a tiny fraction of the wealthiest top one per cent of the population."