Finance Act 2006 - Impact on Trusts - Everyday Law Summer 2007

01 July 2007

Are you a Trustee or beneficiary of a trust? You must be prepared for the new tax rules.

In our spring edition of our Newsletter we explained that new tax rules were introduced by the Finance Act 2006 which affect many existing trusts, and all new trusts created since 22 March 2006.

As part of your trustee duties, you must now consider how the new IHT (Inheritance Tax) rules apply to your trust and take action to make any recommended changes before it becomes too late.

You only have until 5 April 2008 to make changes to your trust if in its current form the new IHT regime would be undesirable. Changes made now could lead to the reduction of IHT charges in the future.

For New Trusts

The new regime creates IHT charges for almost all new trusts. Many existing trusts will also be caught and now be liable to pay IHT. Generally, transfers to new trusts, and additions to existing trusts, may incur an immediate IHT charge at a rate of up to 20%. There could also be a tax charge each time capital is paid out to or for the benefit of a beneficiary and on every tenth anniversary of the trust.

For Existing Trusts

Under the old regime trusts fell into three main categories: • A life interest trust (or interest in possession);

• An accumulation and maintenance trust; and
• A discretionary trust

How are they affected by the new rules?

If your trust contains an interest in possession:

• The same IHT treatment as before will continue to apply to the current life interest(s) but a successive life interest is likely to be taxed under the new regime.
• Some tax planning could be carried out. For example, if the current life tenant has no need for the income his interest could be terminated early in favour of the next beneficiary. The tax position could be better if this is done before April 2008.

If your trust is an accumulation and maintenance trust:

• It will fall into the new regime on 6 April 2008 unless changes are made.
• The interests of each beneficiary could be different depending on their age, potentially leading to inconsistencies in future tax treatment.
• This type of trust requires the closest attention as soon as possible.

If the trust is discretionary the same IHT treatment will continue to apply. However a change in structure could improve the income tax treatment of the Trust Fund.

In some cases the new IHT rules may turn out to be more favourable, and so each trust must be considered individually.

Other things to watch out for include:

• Adding to a trust now – additions will be taxed under the new regime.
• Changing the beneficiaries’ interests – this is now more likely to affect the tax treatment.

We have a detailed knowledge of the new IHT rules and can advise on the best course of action, based on the objectives of the trust and the beneficiaries’ circumstances. Making contact with us sooner rather than later could save the trust money.

For more information please contact Sarah Bogard, Associate & Chartered Tax Adviser.
 

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