Outcry over 'secret wealth tax'

By Daily Mail Reporter
Updated: 10:47 EDT, 6 April 2006

GORDON BROWN was accused last night of secretly targeting millions of middle-class families with a new 'wealth tax'.

A powerful coalition of lawyers and accountants launched a campaign to block changes in the inheritance rules slipped out in the Budget a fortnight ago.

One insurance firm claimed more than four million people face uncertainty over their wills and insurance plans as a result.

At stake is the future of the complex trust system that allows families to plan for the future, including grandparents who want to help grandchildren with school fees.

Emergency Whitehall meetings have been called to try to resolve the dispute after it emerged that lawyers have stopped writing new wills and insurers have frozen the sale of some insurance policies.

The Tories said Mr Brown was taking Labour back to the 1970s when Chancellor Denis Healey promised to 'squeeze the rich until the pips squeak'.

The Treasury hit back, accusing the tax industry of 'scaremongering' and insisting that as few as 300 wealthy people would be affected. But the assurances were drowned by howls of protest by some of Britain's most respected professional bodies.

They said alterations to the law governing certain kinds of trust would hit families planning for school fees, people hoping to inherit property, and children at the centre of family break-ups.

The measures will be published formally by Mr Brown tomorrow in the Finance Bill.

• Read our easy-to-follow Q&A on trusts and the new tax rules.

One of the main complaints is that they will apparently be retrospective, leaving thousands of families facing the prospect of an unexpectedand potentially massive tax bill. Treasury sources insisted existing trusts would be protected.

But the confusion has led to thousands of people receiving letters from their solicitors and tax advisers telling them that work on their wills and insurance policies has been suspended.

Under the changes proposed by Mr Brown - but not mentioned in his Budget speech - two types of trust will be hit with a six per cent charge every ten years from 2008.

In addition, money over the inheritance tax threshold, currently £285,000, will be hit by a 20 per cent 'living' inheritance tax when the trust is set up. When the trust ends, there could be a further charge of up to 6%.

Fuelling further controversy, new rules will require the trust to be payable when a child reaches 18. Currently, 21 or 25 is a more popular age as it is felt the recipient is more likely to use the money responsibly.

The trusts affected are 'accumulation and maintenance trusts' and 'interests in possession trusts', both sophisticated legal vehicles used to shelter assets from tax.

Life insurance policies which have been written into trust will also be affected if they are worth more than the £285,000 threshold. Experts said it represented the most sweeping changes to trust rules in a generation.

Maurice Fitzpatrick, of accountants Grant Thornton, said: 'This is a wealth tax on Middle England. The Treasury says it's worth £15m a year but over the next 20 years the combined effect could soar to £100m a year.

'In my 34 years in accountancy this is only the second time a Chancellor has imposed a retrospective tax on trusts.'