UK: Trusts and Inheritance Tax - Finance Bill Changes

The following is a summary of the changes introduced by the Finance Bill. Many of these are now in force but they could change if amendments are made whilst the Finance Bill is being debated by Parliament. The final position will therefore only be clear on Royal Assent (usually mid July).

• Existing A&M trusts will continue with the existing IHT treatment until 5 April 2008.
• An existing A&M trust can be amended before 5 April 2008 so that the beneficiaries become absolutely entitled at 18. If this is done then the existing IHT treatment will continue until the beneficiaries are 18.
• If no change is made and the trust is worded so that the beneficiaries become absolutely entitled at an age more than 18 then from 6 April 2008 the A&M trust will be taxed as a discretionary settlement - see below.

• With effect from 22 March 2006 it is only possible to create new A&M trusts which escape the IHT treatment of discretionary trusts if the trust is established:-

• The existing tax treatment remains during the existing life tenant's life.

• If an existing life tenant dies, or otherwise ends his interest, in favour of another life tenant before 6 April 2008 then the existing tax treatment will continue during the life of the successor life tenant.

• At the end of the present life interest there will be an IHT charge (the same as at present).

• Under the previous tax regime there would be no IHT charge if at the end of the present life interest the life tenant's spouse took a life interest. This relief is no longer available unless the surviving spouse takes the assets absolutely and the trust ends on the termination of the existing life interest.

• At the end of the existing (or successor) life interest if the trust continues it will be taxed as a discretionary settlement - see below.

• If a nil rate band trust is contained in your Will then the changes will not affect that trust.
• Outright payments to your spouse on your death continue to benefit from the spouse exemption and are not subject to IHT on the first death.
• If you create a life interest trust for your spouse - then the existing spouse exemption is available but only if you comply with the specific terms of the legislation which are very restrictive. The new legislation in particular requires that at the end of the spouse's interest the property must pass outright to the beneficiaries (or at an age no greater than 18 in the case of your infant children). Also, any powers to vary the spouse's life interest must be worded so that either the spouse's consent is required or the spouse is a party to their exercise.
• If you create a trust for your children in your Will then beneficial tax treatment is available only if the trusts provide that they will become absolutely entitled at an age no more than 18. If you specify an age later than 18 then no extra tax will be due on your death but the trust will be subject to the discretionary trust regime outlined below from the date of your death.
• Any grandchildren's trust (whatever age your grandchildren may be and even if they benefit at 18) will not give rise to extra tax on your death but will be taxed from your death as a discretionary trust.
• It is still possible to leave the residue of your estate into a special two year discretionary trust set out in your will. The trustees can then make appointments during those two years to seek to achieve the most tax efficient way of realising your wishes. The IHT rules then tax your estate as if you had yourself set out those appointments in your Will.

• Transfers into the settlement, other than on death, over the ‘nil rate band’ are taxed at 20% as an IHT lifetime charge.

• The settlement is subject to an IHT charge every ten years - currently at 6% of the value of the settlement fund over the ‘nil rate band'; and

• There are ‘exit’ charges when property is paid out of the settlement currently at a maximum of 6%.