The role of trusts as vehicles for estate planning has changed significantly as a result of FA 2006. Discretionary and interest in possession trusts that were established before 22 March 2006 will not generally be affected by the new rules. Special types of trust for children known as ‘accumulation and maintenance trusts’ are potentially affected. Where these trusts are in existence advice needs to be taken as a matter of urgency and certainly before 6 April 2008 when the tax rules for these trusts change.
In general terms the IHT legislation will impose charges to tax on a trust created in the settlor’s lifetime after 22 March 2006 at three stages:
It is important to note that, looked at from the beneficiary’s point of view, the value of their interest in a trust created after 22 March 2006 will not generally form part of their estate for IHT purposes. This is a significant change because, prior to 22 March 2006, where a beneficiary held an interest in possession in a settlement, the value of the trust assets would form part of their estate for IHT purposes.
| Example X created a trust for the benefit of Y in 2002. Y has an interest in possession in the trust and the value of the assets in the trust is £2m. Y dies in 2007 and their estate will be effectively increased for IHT purposes by the £2m value of the trust assets. If the trust had been created after 22 March 2006, there would be no IHT charge on the death of Y. There may now be long term IHT savings in holding assets in trusts, notwithstanding the various IHT charges mentioned above. |