Gordon Brown's shock taxation of trusts has sweeping ramifications

POLITICIANS are trusted less than almost anyone else. At a time when Labour ministers' inexplicably large allowance claims for running a second home comes under the spotlight, the Chancellor, in this year's Budget, has conveniently sidestepped note 25 - a legislative change that will have a substantial impact on inheritance tax (IHT) planning for tens of thousands of individuals.

The latest "stealth tax" move closed the door on transfers of assets to interest in possession trusts and accumulation and maintenance trusts that benefit from the potentially exempt transfer (PET) rule for IHT purposes.

Transfers into these arrangements no longer fall out of the investor's estate after seven years: instead, they are limited to discretionary trust rules where a lifetime rate of 20 per cent tax potentially becomes payable.

In addition to this, there is a 6 per cent tax charge on the trust assets at every tenth anniversary, along with a potential charge when property is later distributed to the beneficiaries.

When the news filtered through, I could literally hear the howls of anguish from advisers, accountants and solicitors who will no doubt demand talks with ministers in the coming weeks on this shocking decision.

The additional work this will cause many advisers, who will have to review existing trusts, does not bear thinking about.

Now it looks like any recommendations I make will have to be deferred for the time being.

So, why refer earlier to ministers making large allowance claims? Well, it appears from records that an "additional costs" allowance of 21,364 for the current year can be claimed for running a second home, which can cover the cost of renting property, say in London, while on parliamentary duty.

However, many are using the allowance to buy another property instead, putting the funds toward mortgage payments.

Nothing in the rules suggest this is not allowed, but property values have increased ten-fold over the past 15 years.

Therefore, when MPs sell up they will benefit from a tidy little profit courtesy of the taxpayer. While they are coining it, everyone else is being hit left right and centre.

• Tom Munro is director of Tom Munro Financial Solutions, Falkirk.