IHT - attack on trustsIHT - attack on trustsYou will be aware that Gordon Brown’s Budget statement included changes to the inheritance tax (IHT) treatment of some trusts. These created alarm and uncertainty.
Although there have been some amendments made, it remains advisable to have a health check on any trusts that you may have created or on your Will if it provides for the creation of a trust.
This area is highly technical and accordingly this article covers only the very key issues.
Lifetime transfers into Accumulation and Maintenance (A&M) trusts and Interest in Possession (IIP) trusts have always been exempt from IHT if the settlor lived for the next seven years. Also they have not been subject to the periodic or exit charges suffered by other trusts.
From 22 March 2006, the rules currently applying to discretionary trusts will apply to both A&M and IIP trusts. So there may be:
Existing A&M trusts which provide that the assets in trust will go to a beneficiary absolutely at 18 retain the old IHT treatment. However, few trusts provide for this since 18 is widely considered to be too young. Therefore, one of the amendments to the legislation is that if a child becomes absolutely entitled to assets at or before the age of 25, rather than 18, then IHT charges may only arise for the seven years post age 18. If existing trusts modify the terms to provide for absolute entitlement at between 18 and 25, the above concessions will also apply.
The old IHT rules for existing IIP trusts will run on until the interest in the trust property at 22 March 2006 comes to an end. Also, the current interest may be changed before 6 April 2008 and the old IHT treatment may be retained.
Trusts for disabled persons and certain trusts created on death for a child or which create a life interest are exceptions to the new rules.
All existing trusts should be reviewed to ensure future IHT is minimised and Wills may need to be changed.