Inheritance Tax The Aftermath of the 2006 Budget



On the 22nd March 2006, the Chancellor, Gordon Brown, delivered his tenth Budget, which introduced some significant changes to the taxation of trusts.

The changes were introduced to prevent tax avoidance by wealthy families, and we were told that they would only affect the very wealthy and would not affect the majority. It seems that the Treasury had no real idea how far reaching the changes were and the impact they would have on millions. Since then, there has been outcry by lawyers and accountants at the impact, which has lead to the Treasury re-thinking the proposals and amendments were made to the Bill as it passed through Parliament.

The Changes

Accumulation and Maintenance Trusts
These are trusts set up for the education and maintenance of children and previously received beneficial inheritance tax (IHT) treatment. As from 22nd March Accumulation and Maintenance trusts formed during lifetime will be treated in the same manner as a discretionary trust so that:

>    An immediate charge to IHT will arise on creation if the value of the trust is in excess of the nil rate band (currently £285,000.00). Tax at 20% will be payable on the amount by which the gift exceeds the nil rate band.
>    Trusts of this nature will be subject to an IHT charge every 10 years with tax payable at a maximum of 6% on the value of the trust fund which exceeds the nil rate band.
>    If property is removed from the trust an IHT exit charge will apply if the value of the trust fund exceeds the nil rate band.
>    These changes will apply to existing trusts from 6th April 2008, until then transitional arrangements will apply.

It would seem that there is now little point in establishing an Accumulation and Maintenance trust during lifetime.

New trusts set up under a Will by a parent will be free of IHT throughout the trust's8217;s life if the child becomes absolutely entitled to the funds at 18. There will though, be a chargeable transfer when the trust arises on the death of the parent. If the child were not to inherit until the age of 25 then the trust will be subject to IHT meaning that the 10 year exit charge would be 4.2% (7/10ths of the 10 year charge).

For further guidance with issues arising from wills and inheritance visit www.fbcsolicitors.co.uk/private_client.htm .

Interest in Possession Trusts
These are trusts in which the beneficiary is entitled to income from trust property or entitled to occupy a trust property. Life interest trusts set up by Will can continue after the death of the life tenant with a trust for the children of the testator. If the life tenant were the deceased's8217;s spouse, then spouse exemption would be available. If the children become entitled at 18, then no additional IHT liability will arise, and if over 18, then the exit charge mentioned earlier will apply. The funds will continue to form part of the life tenant's8217;s estate for IHT purposes, if the life tenant is the deceased's8217;s spouse. If not, the 10 year charge mentioned above will apply to trusts arising after 22nd March 2006.

Discretionary Trusts
These are trusts in which the trustees can make a choice among beneficiaries and are not affected by the changes.

Summary
The amendments have lessened the blow to the tax payer but still means that the IHT planning options available are limited. An urgent review of Wills relying on spouse exemption is not now required. However, review in light of the provisions made for children should be examined if the estate is likely to exceed the nil rate band. In practice, many people may choose to pay the additional IHT in order to ensure that their children are of sufficient maturity to deal with a sizeable inheritance.

To learn more about Inheritance Tax and other legal matters visit www.fbcsolicitors.co.uk/ .





Inheritance Tax The Aftermath of the 2006 Budget