Trust tax changes 'not the way law should be made'
Friday, 23 June 2006 12:00 AM
The government caused "needless" public concern by failing to properly think through and consult on changes to inheritance tax on family trusts, peers have warned.
In a highly critical report, the House of Lords economic affairs committee says Gordon Brown's decision to change the way money left in trust to spouses or children was taxed was not based on proper consultation or properly explained to the public.
The changes, made in the chancellor's Budget this year, provoked outrage, and many in the finance industry warned they could result hundreds of thousands of people having to re-write their wills to take account of the new rules.
Mr Brown has since withdrawn many of the proposals by tabling amendments to the finance bill currently going through parliament, restoring the inheritance tax break for money left to spouses in trust and all but scrapping it for young people.
But today's report warns the amendments would not have been necessary if the Treasury had made clear what it wanted the changes to achieve - namely the laudable aim of tackling tax avoidance - and exactly who would or would not be affected.
"We welcome also the fact that the government has introduced a large number of amendments designed to deal with some of the criticisms of its measures on the taxation of trusts," said committee chairman Lord Wakeham.
"However, a lot of people have been needlessly worried by the original proposals, and there might have been little need for amendments if the government, before introducing the measures, had consulted on them in such a way as to make clear its objectives in countering tax avoidance.
"This is not in our view the way in which tax changes should be made."
Shadow chief secretary to the Treasury Theresa Villiers welcomed the report, saying the chancellor had been guilty of a "back of an envelope job" in announcing the changes.
"He didn't consult; he didn't mention the proposals in his Budget speech and he got them seriously wrong," she said.
She added: "The chancellor may have U-turned on some key issues but these new stealth taxes could still hit people with mental illness and those getting divorced. Those with life insurance policies could also face an unwelcome new inheritance tax bill."
Before the March Budget, people putting money into trusts for their spouse or young children at least seven years before their death did not have to pay inheritance tax, providing the child in question claimed before they reached 25 years old.
But under the changes, money being put in these trusts would be subject to inheritance tax and the total trust would be charged six per cent interest every ten years. They would only be exempt for trusts set up for children under the age of 18, or for a disabled person.
Following an outcry from the financial sector, however, the Treasury effectively restored the exemption from these charges for spouses and said children's trusts would be exempt from inheritance tax, and only pay a 4.2 per cent charge between the ages of 18 and 25.
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