Since Budget day there has been much lobbying of the Chancellor on the changes to trusts and some amendments have been made.
The changes announced were aimed mainly at Accumulation and Maintenance (A&M) trusts and Interest in Possession (IIP) trusts. Lifetime transfers into A&M trusts or IIP trusts have always been exempt from inheritance tax (IHT) if the settlor lived for the next seven years. These trusts have also not been subject to the periodic or exit charges suffered by other trusts.
The new rules will apply the treatment currently applying to discretionary trusts to both A&M and IIP trusts. So, in the future there will be:
The new rules apply from 22 March 2006 to new trusts and to additions of new assets to existing trusts.
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 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.
If you created a trust before Budget day or have a Will which creates a trust on death, you may wish to contact us to see if it remains tax efficient or if you need to change the terms.