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Last Updated: Thursday, 5 April 2007, 13:18 GMT 14:18 UK
Brown hits assets left to children
MONEY TALK
By Fiona Graham
Financial planning expert at law firm Boodle Hatfield

Fiona Graham, of law firm Boodle Hatfield
Fiona Graham, of law firm Boodle Hatfield
The latest Budget announced wide-ranging changes to the rules on inheritance tax (IHT) and trusts that will see all assets left to children hit by a 6% charge.

Gordon Brown has decided to clamp down on all situations where a family's hard-earned assets are to be retained for children over the age of 18.

In practical terms, this will have a major impact for people considering what should happen to their assets if they die and leave small children.

Typically if they have made a will, they would think to appoint guardians for the children, and for their assets to be spent for the children on clothing, school fees etc. while they are minors and in education, but not allow the children to receive any significant money until, say, they reach the age of 25.

Their logic is that they would "protect children from themselves" by restricting them from inheriting significant amounts, feeling that 18 is too young.

They worry that at 18, a child would spend the money improperly on fast cars and high living.

Whereas at 25, the hope is that he or she is more mature, perhaps settled in a job and/or relationship, and will spend inherited funds more sensibly.

Extra tax to pay

However, Gordon Brown's announcement indicates that, in addition to IHT at 40% on the parents' deaths, unless the age of receipt is set at 18 in a will, those funds held for the orphaned children will suffer a 10-yearly inheritance tax bill at up to 6%.

These moves are highly unusual and controversial, as they will encourage inherited funds to be given to children at 18 to avoid this new tax liability

There will also be a tax bill on any significant application of funds for the child ("exit charges") and even more tax on his or her 25th birthday.

Before this announcement, there would have been no IHT charges before he or she was 25, nor on receiving funds on his 25th birthday.

The impact of the announcement indicates that for a child orphaned at a very young age, his inherited assets face a further bill of up to 15%, bringing the total lost to tax of up to 55% - more than half of the assets his parents left for him.

And those figures assume no increase in the value of assets themselves, which, over 25 years, could be substantial if sensibly invested.

As, every 10 years, the value of the money in trust over the IHT threshold at that date will be taxed at 6%, IHT is paid on that (as yet unrealised) investment return, as well as capital gains tax if those assets were actually sold.

Lifetime gifts

Gordon Brown also announced that, from 22 March, any lifetime gift in trust for children would be taxed at 20% on creation.

It was previously possible for a wealthy relative to make a gift to young family members and avoid any IHT liability, provided that relative survived for seven years.

Provided the beneficiaries of the trust took at least the income from their money at 25, there was no IHT liability on the trust or beneficiaries.

Gordon Brown will now take 20% on the creation of the trust, regardless of the payout age, along with his 10-yearly 6% and exit charges.

These moves are highly unusual and controversial, as they will encourage inherited funds to be given to children at 18 to avoid this new tax liability.

The only exceptions are trusts for charities and disabled persons.






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