Inheritance Tax changes to Trusts after Budget

4th Apr 2006

Emma Gray of the Wills Trusts & Probate team provides a budget update concerning Lifetime Discretionary Trusts.

Have you created a Lifetime Discretionary Trust?

If the answer to this question is yes, then you should be made aware of the Chancellor?s announcement in his Budget regarding the proposal to alter the inheritance tax regime for ?Accumulation and Maintenance? and ?Interest in Possession? Trusts. This will have far reaching implications for new or existing Trusts that do not meet a strict set of circumstances.

The Chancellor has allowed until 6 April 2008 for Trustees to seek advice on the implications of these measures and to modify existing Trusts where applicable, in order to mitigate the tax charges.

Who is likely to be affected?

Accumulation and Maintenance Trusts

People who have set up, or have an interest in, ?Accumulation and Maintenance? Trusts ( ?A & M? Trusts) and/or ?Interest in Possession? Trusts are likely to be affected. A & M Trusts are special Trusts for children/grand children which, until now, qualified for special inheritance tax status provided the beneficiaries became entitled to income by the age of twenty five at the latest. They have been used to a significant extent as a way for parents and grandparents to fund the needs of their children/grand children for the last thirty one years. From 6 April 2006, except in very limited circumstances, anyone establishing a new A & M Trust will be subject to an inheritance tax charge at 20% on the value of the chargeable assets gifted to that Trust in excess of the Nil Rate Band (£285,000 from 6 April 2006). In addition, these Trusts will be taxed on a ten yearly basis at 6% on the excess over the Nil Rate Band.

Life Interest Trusts

These Trusts often come about in order to protect family assets, for example, in the context of potential divorce of children and to enable the property to be managed on behalf of the children. These Trusts are commonly used by parents to provide for their adult children. These Trusts will now become subject to the discretionary trust regime when the life tenant?s interest comes to an end unless, on the death of the existing life tenant, the property passes outright to another individual.

Finance Bill 2006

It is evident that the Chancellor?s announcement regarding the above was not put out to consultation, which, considering the proposals are retrospective, is surprising. Full details of the proposals are not yet known although the Finance Bill (published early April 2006) should provide more insight.

If you have any queries regarding the above changes, please contact me on 01325 466794 or one of my colleagues in the Wills Trusts and Probate Department to receive further advice.

Author: Bryan Hoare