Current government policy on wealth transfer is frankly bonkers. Time for a serious rethink, says Caroline Garnham
our years ago, William sold his business for £140 million. He has two sons, Michael and Christopher. Both the boys had worked hard at school and university and had settled into good professions, Michael as an accountant and Christopher as an architect.
In 2007 William, aged 68, was diagnosed with a heart condition which, although not fatal, made him conscious of his mortality. When he looked into the prospect of providing for his sons, he was irritated to discover that if he transferred part of his wealth to a trust for his sons now, he would have to pay 20 per cent tax; if he left them his wealth on his death he would have to pay 40 per cent; but if he gave it to them outright and survived seven years, he would pay no tax at all!
He liked the idea of a trust but decided, since he believed his sons to be responsible, to save on the 20 per cent tax and give each boy £15 million. Before doing so, he had a long chat with each. He asked them to discuss with him whether, and if so when, they wanted to invest the capital, if it was to be used for anything other than a diversified investment portfolio.
In 2008 Michael, aged 28, decided to buy a mail-order business for luxury products. William did not approve, saying that he thought the economy was due for a correction and that luxury products would not be sustained. Michael, determined to prove his father wrong, went ahead. The business is a failure and he has been haemorrhaging his capital ever since.
In the meantime, Christopher started to date an extremely attractive and determined woman, who suggested that Christopher design and build a luxury home. William again advised against it, but Christopher was convinced that he would be able to set up a practice on his own which would be a success when people could see what he was capable of. Christopher has since married, although the marriage is increasingly looking unlikely to survive. His wife is now pregnant.
William does not now have good relations with either son. He thinks his hard-earned money could have been preserved if he had transferred the money into a trust, when he could have decided himself when and how to invest the capital.
To set up a trust, William (the settlor) would need to transfer wealth to trustees, such as himself, his wife and their private-client lawyer to own the wealth not for their own benefit but for the benefit of his sons in accordance with a trust deed. He believes that if the money had been put in trust, his sons may have resented their father for a while, but the resentment would have been better than the breakdown in communication that has now happened.
he advisory board of Family Bhive, the interactive website for wealth owners, is keen to raise the awareness of trusts as an essential tool for responsible wealth planning. But in the current climate, any suggestion to roll back the tax law of 2006 which introduced the 20 per cent inheritance tax on transfers into trust would likely be met with ridicule. The government may, however, be willing to consider reducing the 20 per cent tax on trusts if wealth owners were to accept a tax on gifts at the same rate.
William is of the opinion that a tax of 4 per cent on all gifts, whether into trust or outright, would be acceptable, and he would then set up trusts for both boys in an attempt to mend bridges and give them both a second chance. A tax of 20 per cent, even with his experience, is just too high. He would rather give it to charity and pay no tax.
Oddly, the value of trusts has been recognised by this government. In 2006 the then Lord Chancellor said: ‘The trust is one of the greatest creations of English law and trust business is a very important part of the UK’s professional services industry.’ It is perverse, then, that in the same year the government introduced a penalty tax charge on its creation.
Family Bhive is asking its individual members whether, like William, they would be prepared to accept a tax on gifts if the tax on the transfer of wealth into trusts were to be significantly reduced. If the majority of wealth owners want trusts to be taxed at a lower rate and are prepared to accept a tax on gifts, then Family Bhive will join with the Society of Trust and Estate Practitioners and the Estates Business Group to devise a formula, to supply and unify the capital taxation of succession, to include capital-gains tax as well as inheritance tax, with the aim of getting more tax into the Treasury. Currently no tax is being raised, because no one is setting up trusts.
The government is looking at ways to tax wealth owners as a means of replenishing its depleted coffers. In the recent past it has shown a staggering lack of understanding about the motivation and requirements of wealth owners. If wealth owners do not unite in making their voices heard and put forward a suggestion of what they want and are prepared to pay for, a swathe of unacceptable and incomprehensible taxation is likely to be introduced with minimum consultation or discussion, as we saw in 2006. If you want your voice to be heard, join Family Bhive and let your views be known, anonymously and in confidence.