With less than three months until the start of the new tax year, time is running out for those who want to change their trusts so as to avoid some of the measures brought in as a result of the 2006 Budget.
A two-year transition period was included at the time to allow those with trusts the time to consider their options without making rash decisions. Now, Standard Life has pointed out, they must act or potentially suffer unfavourable consequences.
The 2006 Budget announced changes to the inheritance tax treatment of Interest in Possession (IIP) and Accumulation & Maintenance (A&M) trusts.
IIP trusts are often used to hold offshore bonds and are also known as flexible trusts. After 6 April trustees will not be able to change the named beneficiary without triggering a tax charge.
Julie Hutchison, estate planning specialist at Standard Life Assurance, explained: “The great opportunity is for trusts where the trust interest can now be passed down to the next generation. This would be ideal where, for example, the existing IIP beneficiary has no requirement for the trust assets and wants his/her own children to benefit instead. Taking action to change the beneficiaries before 5 April 2008 means that the trust is not brought into the new regime.”
The new regime could involve 10-yearly charges and exit charges for IHT. All gifts to flexible trusts since 22 March 2006 have fallen under this more complex IHT regime.
For A&M trusts time is running out to change the age at which beneficiaries receive their assets. Under the new regime all trusts must pay out to their beneficiaries at age 18 or face higher inheritance tax charges.
By changing the age of the beneficiary to 18, the IHT charge can be sidestepped. A halfway-house revision in the Finance Act 2006 means changing the age of the beneficiary to 25 triggers a 4.2% IHT charge, while taking benefits at any other age will mean a charge of 6% - which might still be viewed as better than giving an 18-year-old unfettered access to a large pot of capital.
Hutchison commented: “Trustees of A&M trusts should take legal advice now, since there is a variety of options and the wording of the trust might create restrictions on what can be done.”
Paul Bruns and Elaine Parkes
3,000 left to transfer
Record numbers of people aged 90 plus
From 3 to 10 October