Share on LinkedInShare on LinkedIn

ARTICLE · 25 APRIL 2006

Trusts and Inheritance Tax - Finance Bill Changes

Pinsent Masons
Explore more from Pinsent Masons

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).

United KingdomTax
Janet Hoskin
Janet Hoskin
Nigel Binks
Nigel Binks
Lisa Parisi
Lisa Parisi

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).

Summary of the New Rules

Accumulation & Maintenance Trusts

  • 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:-

- on death;

- by a parent for his or her children;

- on trusts under which the children become absolutely entitled at 18.

Interest in Possession Trusts

  • 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.

    Wills

  • 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.

    • Existing IHT Treatment of Discretionary Settlements

  • 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%.

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

    Related Articles

    Legal Intelligence Newsletters

    Read more about

    Related Comparative Guides

    See more popular content from

    Article

    Tribunal Limits HMRC's Schedule 36 Powers In Transfer Pricing Case

    When HMRC issued an information notice demanding a UK subsidiary's US parent company financial statements in a transfer pricing enquiry, the First-tier Tribunal had to determine whether such documents were reasonably required and whether the subsidiary had the power to obtain them. The case examines the boundaries of HMRC's information-gathering powers and the practical limits of corporate group relationships.
    European UnionTax
    RPC
    RPC
    Article

    Frequently Asked Questions About IRS Clearance And Form 706-NA

    UK executors and beneficiaries dealing with US assets face significant delays in obtaining IRS Transfer Certificates, with waiting times now extending to two or three years. This comprehensive FAQ addresses the critical questions surrounding Form 706-NA applications, US estate tax requirements, and the practical challenges of administering estates containing US shares and investments when the deceased was not a US citizen.
    GlobalTax
    Lester Aldridge LLP
    Lester Aldridge LLP
    Article

    UK ‘Windfall’ Bank Tax Would Worsen An Already Complex System

    UK banks face the prospect of a new windfall tax as campaigners push for additional levies on strong reported profits, while industry leaders warn of potential consequences for lending, investment, and the UK's position as a global financial centre. This analysis examines the practical implications of adding another layer to an already complex sector-specific tax regime that includes corporation tax, banking surcharge, and bank levy.
    United KingdomTax
    RPC
    RPC