It has been reported today that HMRC is looking at ways of making people pay inheritance tax before they have died if it is suspected that they have tried to avoid having to pay inheritance tax. The proposal is like something out of the film Minority Report in which people were arrested on the basis that it was foreseen they might commit a crime, only here the government are considering taxing individuals foreseeing that they might one day have a taxable estate!
HMRC seems to believe that the only reason someone would use a trust is to avoid tax. However, the majority of trusts that I set up for my clients are not motivated by tax but by a desire to ensure that children from a first marriage won't lose out if the surviving step-parent re-marries, to protect funds for their children until they are sensible enough to handle the funds themselves, or to provide assistance where there is a disabled person who is unable to handle finances and needs someone else to deal with this on their behalf.
If there are schemes or trusts that the government does not like then it is fully within their power to change the law, rather than vilify and persecute those who have the temerity to use legitimate estate planning techniques to provide for their beneficiaries. Also, how does HMRC know whether the person won't have spent most of their estate before they die - or will spending and enjoying the fruits of a life's labour become tax avoidance too?
HMRC is reported as saying that trusts that "are used legitimately in many arrangements by the vast majority of people” would not be affected. However, considering that there are already new rules coming in next year that provide a lifetime limit on the amount a person can put into trust, this new proposal does seem a little like HMRC is using a sledgehammer to crack the IHT nut.
For a decision to be taken ahead of time, based on a suspicion, that someone owes (or will owe) tax at some point in the future, instead of waiting until that point seems a bit like something dreamt up in Hollywood.
