The Finance Act 2006 introduced a new category of trusts called Bereaved Minors Trusts. This trust could be set up by way of a will or under intestacy. Broadly, the trust is for minors under the age of 18 who are living and are entitled to benefit from the capital or the income of property.
Bereaved Minors Trusts and Inheritance Tax
Bereaved Minors Trusts escape facing inheritance tax liability where:
- the bereaved minor receives absolute ownership on or before their 18th birthday, or
- property is applied for the maintenance of the bereaved minor, or
- the bereaved minor dies before reaching 18.
Section 32 of the Trustee Act 1925 enables trustees of a trust to distribute assets for the benefit of the bereaved minor and also manage the capital asset for and in the interests of the minor without the court having to intervene. However, with the introduction of the new Finance Bill 2013, trustees powers will either be excluded or restricted.
Impact of the Finance Bill 2013
The proposed changes mean that any property transferred after 8 April 2013 to the trust will be done without the benefit of provisions in section 32 of the Trustee Act 1925. If the testator wishes for section 32 powers to apply then the trust will not fall into the category of a Bereaved Minors Trust and therefore the bereaved minor would be disadvantaged as the inheritance tax liability would reduce their entitlement.
In addition, if the trust is a Bereaved Minor Trust, then under the proposed changes, the restriction of the trustees powers may mean that the court has to intervene in relation to the management of the trust. This would mean further costs that would be deducted from the trust fund (and therefore reduce the entitlement of the bereaved minor).
The Law Society are concerned that parents with existing wills may have to have their wills redrafted as a result of the proposed changes. The Law Society has expressed their concerns to HMRC and Lucy Scott-Moncrieff, president of the Law Society said:
“I’m sure the government doesn’t intend to penalise orphaned children, or to require a significant number of parents to redraft their wills to protect their children’s futures. We all know that unintended consequences can arise from legislation and it is very fortunate that the watchfulness and diligence of our expert solicitor members gives the government the opportunity to put this right before it creates injustice, confusion and unforeseen expense.”
The Law Society are awaiting for HMRC to respond to their concerns.