Articles
UPDATE on Inheritance Tax Treatment for Trusts
You may be aware of the recent proposals to amend the tax rules applying to trusts outlined in the Budget 2006. The Government aimed to refine the current Inheritance Tax (“IHT”) rules to apply the same IHT treatment to “accumulation and maintenance” trusts and “interest in possession” trusts as it does to “discretionary” trusts. Under the new proposals a transfer into these types of trust would potentially trigger an immediate IHT charge of 20% with an IHT charge every ten years – currently at 6% of the Trust Fund over the ‘nil rate band’ (which is £285,000 since April 6th 2006). Previously the trustees could retain control until the beneficiary was 25 years of age. Under the new rules the beneficiaries will receive the assets held in trust at age 18 or the trust could face a 6% tax charge every ten years on the value of assets over the IHT threshold.
However the Government has now amended the proposed rules under the new Finance Bill. Whilst this has not yet come into force, it would retain the upper age limit of 25 years for the beneficiary of assets held under a Trust as well as allowing spouse exemption in relation to second marriages to remain in force. A trust that closes on the child’s 25th birthday will face a tax charge of just 4.2% on any amount over the IHT threshold at that time.
The proposals do however still raise concerns for grandparents, disabled people, trusts set up on divorce and existing trusts which may still be affected by the changes. Therefore it is important to seek advice if applicable to your circumstances.