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| Focus on Tax Treatment of Trusts |
| Introduction |
This years Budget made far-reaching changes to the inheritance tax treatment of trusts. These changes take effect from 22nd March 2006 and will affect new trusts and from 2008 existing trusts. They will also have a significant effect on Wills and also trusts with either onshore or offshore trustees.
his briefing concentrates on how the changes will impact upon UK Wills and Trusts. If you are a Non-Domiciled individual and you either have or are about to establish an offshore trust then please contact us as the rules may have a different effect on you particularly if you have property in the UK. |
| Inheritance Tax (IHT) |
| To recap IHT is the tax charged on a person’s estate on death and also on gifts into discretionary trusts (DT’s). The rate is 40% of the value of the assets passing into the DT or the size of the estate in excess of the tax free threshold (known as the nil rate band). This is to be increased to £285,000 from 6 April 2006, rising gradually over the next few years to £325,000 by 2009/10. |
| Changes to the Taxation of Trusts |
In addition to DT’s people also use Accumulation and Maintenance (A&M) and Interest in Possession (IIP) trusts as a means of protecting assets particularly for minor children e.g. to save for school fees or to ensure that a beneficiary receives income whilst ensuring that the capital of the trust is preserved.
Prior to the Budget gifts into these two types of trusts were treated more favourably than DT’s as they were treated as potentially exempt transfers. This means that there wouldn’t normally be any IHT so long as the person establishing the trust survived for 7 years. What is concerning is that these once favoured trusts are now to be brought into line with discretionary trusts, so that there will be potential IHT issues on creation, a charge to IHT every ten years and a tax charge on assets leaving the trust |
| Who will be affected? |
| The new rules will affect almost everyone especially those who have written a Will or set up a trust. In each case the documents will have to be reviewed in order that we can help you decide how and when any changes should be made so as not to fall foul of the rules. |
| How does the Tax Charge Work? |
Both new and existing trusts will be brought within the inheritance tax regime which currently applies only to DT’s which (in brief) imposes:
An immediate 20% inheritance tax charge on creation of a trust;
A further 6% inheritance tax charge on every 10th anniversary of the trust; and
An exit charge of up to 6% if property leaves the trust between 10 year anniversaries.
The calculations involved are complex and, the regime is significantly harsher than that which has until now applied to A&M and IIP trusts. |
| A&M Trusts |
The new rules will apply as from 6 April 2008 unless the trust already states or is changed to provide that capital will vest in the minor beneficiary at 18. Most A&M trusts were created purely to avoid a child receiving capital at such a young age and a higher age limit such as 25 was the norm. We can assist in changing the trust to ensure that the trust does not fall foul of the rules and we can also help establish whether there are any ways in which the capital payment to the child can be delayed until a later date.
All other A&M trusts will become subject to the new rules as from 6th April 2008 unless they fall within any of the exemptions. |
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