July 2006

Trust Clampdown – Finance Act 2006

The Government have finally published the new rules first announced in the March budget. The rules hit two types of trust that are often written into wills to provide for family members. Families may now need to review and rewrite their wills or they could be subject to inheritance tax (IHT).

Accumulation and Maintenance Trusts (A&M)

These were often used by parents and grandparents to give money to children for expenditure such as school fees.

Before the budget, gifts into A & M trusts made during one’s lifetime were treated as potentially exempt transfers and therefore exempt if the donor lived for another seven years.

Now, however, you must pay IHT at 20% on the value of the gift above the IHT threshold, currently £285,000. The trust’s assets are also subject to a 6% tax charge every 10 years.

Interest in Possession Trusts (IIP)

These were used to have one beneficiary entitled to income and another entitled to capital. They were used to provide an income for their spouse but made sure capital passed to their children if the spouse remarried.

As with A & M Trusts they will also be subject to the new rules.

Existing Trusts

Existing A & M Trusts can keep control of their assets until children are 25 but will be subject to a tax charge only from the child’s 18th birthday, with a maximum charge of 4.2%.

The only way to avoid ongoing tax charges altogether is to make sure the children become entitled to the assets at 18.

The government has given people until April 6, 2008 to decide which option to go for and change their trust.

However, the rules are different for IIP Trusts as they can continue under the old rules. If you decide you want someone else to be entitled to the income, the trust will be hit with a 20% charge from 2008.

If your will sets up an A&M or an IIP Trust you will be caught by the new rules when you die.