For trusts that hold only or mainly illiquid assets, the periodic charge can mean there are insufficient funds available to settle the charge.
Non-trust assets may often need to be added or loaned to the trust to pay for periodic charges, which leads to further complexity.
In the case of discretionary trusts, although these factors are evidently negative, they can fairly be seen as the price to be paid for the benefit of the flexibility, protection and control they offer.
The government’s consultation suggests at least a possibility that the IHT periodic charge rate for relevant property trusts may increase.
Any proposal to increase the periodic charge rate should be considered very carefully. If the rate were to increase, this could cause substantial problems for a number of trusts, including long-running family trusts.
Any increase in the current rate of IHT would effectively have a retroactive effect, such that trusts previously entered into with sensible and legitimate planning objectives might immediately become unviable.
The end result could well be that family estates and structures designed for asset protection and preservation may be broken up. It is difficult to see how this would be for the public benefit, or a fair outcome.
In the case of lifetime IIP trusts, fairness and neutrality are lacking in their tax treatment. Before the Finance Act 2006, settling property into a lifetime IIP trust would have been a PET for IHT purposes.
In other words, such transfers did not trigger an immediate charge to IHT provided the settlor survived the transfer by seven years (in line with the treatment of outright lifetime gifts to individuals, which today continue to be treated as PETs).
Following the 2006 changes, transfers into lifetime IIP trusts fell within the relevant property regime, giving rise to the immediate 20 per cent IHT entry charge, and periodic and exit charges referred to above.
The 2006 changes seemed to reflect a perception that trusts were used for tax avoidance, and their use should therefore be discouraged.
This perception is an old chestnut, but one worth considering again. A straightforward lifetime IIP trust is not generally considered to be a mechanism for tax avoidance, particularly when seen in conjunction with the anti-avoidance provisions of the Finance Act 1986 and the Inheritance Tax Act 1984.
When combined with the General Anti-Abuse Rule and the current disclosure requirements for trusts, it is difficult to see what scope there is for tax avoidance in the context of lifetime IIP trusts.
The tax treatment of post-2006 lifetime IIP trusts is therefore neither fair nor neutral, as it discourages their use when compared with making an outright gift.
