The Government must take action to restore the neutrality of trusts, urges WAY Investment Services, provider of trust-based inheritance tax planning solutions.
John Humphreys, inheritance tax specialist at WAY Investment Services, said: "There is definitely scope to improve simplicity in the way trusts are taxed. Trusts are absolutely not simply the preserve of the rich. There are many scenarios where trusts make sense for families - including those with far more modest estates.
"The key opportunities lie in assessing the tax within an individual's account, rather than taxing the trust itself. We believe it is perfectly reasonable for the government to be focusing on the principles of transparency, fairness and neutrality, and simplicity - but changes are needed in order to achieve those outcomes.
"The 20% entry charge, the periodic charge, and the complex application of income tax to trusts are all hurdles which prevent advisers from recommending them and families from choosing them."
The group also feels inconsistencies in the available exemptions for IHT have led to unintended effects. For exmaple, trusts are disadvantaged compared to passive investments into some unlisted shares, such as on the Alternative Investment Market (AIM).
WAY says the two-year rule for passive Business Property Relief (BPR)-qualifying investments and the seven-year rule for gifts should be aligned for IHT purposes. Meanwhile, it believes business relief should still be available on qualifying AIM Shares as it encourages investment into small, growing entrepreneurial businesses.
It said: "Crucially, this change should apply where the investor is not a key person related to the business itself. WAY says the qualification period should remain at two years for qualifying investments where the owner is a key person within the business, such as interests in a family firm or controlling shareholdings - going back to the original reason BPR was established more than 30 years ago.
"But for passive investors, a seven-year qualification period would also encourage a sensible minimum investment horizon for such high-risk assets."
Humphreys added: "The current rules for BPR risk distorting the purpose of making an investment. Aligning the time taken to qualify for IHT savings would mean that the choice between an AIM investment and gifting capital could be made on its own merits."