The Finance Bill 2006 has been published with a guidance note from Her Majesty's Revenue and Customs (HMRC) to clarify there will be no retrospective Inheritance Tax (IHT) charge on trusts written before Budget Day.
HMRC says the Finance Bill sets out the details of how the rules for Accumulation and Maintenance Trusts and Interest in Possession (IIP) trusts will be applied.
It states there will be no retrospective tax charge and no-one who wrote a life insurance policy into trust before the 22 March will have to pay an IHT charge as they will continue to be exempt in the same way they were before the Budget.
As a result the guidance note claims statements claiming millions of people will be affected by the change “remain simply incorrect”.
HMRC claim the Finance Bill and its explanatory notes provide complete certainty the new rules will not apply to life insurance policies entered into before 22 March, even where the policy holder continues to make payments after the Budget under the original terms of the policy.
The Bill also intends to make clear all future, as well as existing, bare trusts will not be affected by the changes, to allow straightforward life insurance policies, set up to pay off a mortgage if a person dies, are also outside the rules.
Other exempt circumstances specified in the guidance note include:
- Anyone who takes out a new insurance policy designed to provide security for their families if they die will not be affected provided there is either no value in the trust to tax, which is the vast majority of cases, or if the value is below the IHT threshold of £285,000. If the value crosses the IHT threshold, the maximum charge will be 6% after 10 years on the excess amount.
- A new insurance product which has an investment element is also not affected unless it has accumulated over £285,000 in a seven year period, which is equivalent to savings of £40,000 a year or a single payment of £285,000.
For both cases IHT is only paid on the amount above the current IHT threshold, which rises to £325,000 by 2009.
And so far as new trusts are concerned, created on or after 22 March, the IHT rules continue the current special treatment for:
- Interest-in-Possession trusts created on intestacy and straightforward Interest-in-Possession trusts created by will
- Accumulation and Maintenance trusts created on the death of a parent where beneficiaries will take the trust assets at age 18
- Trusts for disabled persons will also continue to enjoy special treatment, as will existing regular premium life insurance policies written into trust.
As a result HMRC claim these factors mean the Government’s estimate of the revenue raised from the new measure will be only £15m a year and will affect only a very small number of wealthy people.
HMRC also states existing spouse exemptions and other reliefs from IHT will continue to apply where a trust is set up in the case of an individual with dependents dying intestate.
Meanwhile, where a trust is set up by a will, trustees will have two years, if needed, to alter the terms of the trust to comply with the new rules, this may be necessary where a trust is set to benefit a child when they reach the age of 25.
THis is because the new rules reduce the age limit at which children should become entitled to the assets of a trust from 25 to 18, which HMRC is designed to simplify the system and bring the age limit for IHT in line with those for income tax and capital gains tax.
The Treasury, says the Budget statement set out decisions to build a strong and strengthening economy to invest in Britain’s future, and the publication of the Finance Bill 2006 will enact may of the Budget measures.
Dawn Primarolo, Paymaster General, says: “The Government is committed to creating a modern and fair tax system which encourages work and saving and provides the foundation for building world-class public services. The Finance Bill introduces important measures to modernise taxes to keep pace with a changing world, and to tackle tax avoidance and fraud.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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