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Last Chance to Review Trusts

Individuals must make any changes to their trusts before the deadline of 5th April 2008 if they want to have them reviewed in light of the Finance Act 2006.  Any trusts that are not amended at the start of the new tax year will be subject to an Inheritance Tax (IHT) assessment every ten years, and possibly subsequent taxation.

The Finance Act 2006 confirmed changes by the government to the treatment of Interest in Possession Trusts (IIP) and Accumulation and Maintenance Trusts (A&M).  After 6th April 2008 these are to be treated as Discretionary Trusts for IHT purposes.

IIP Trusts entitle beneficiaries to the use of income or enjoyment of the trust fund during their lifetime.  If, for example, a deceased wife were to leave property, she could specify that her husband could use the property for his remaining lifetime, before it reverts to her children.  For IHT purposes, the husband would have technically ‘owned’ the property and so would be charged up to 40% IHT on his death.

A&M Trusts allow the trustees to decide which beneficiaries were appointed funds.  These have often used by grandparents to ensure their grandchildren benefited in the most tax efficient way, as IHT did not restrict the appointment of funds.

From April 2008 these trusts will come under the Discretionary Trust IHT treatment.  Discretionary Trusts, like A&M Trusts, allow beneficiaries to allocate funds wherever they see fit.  However, to ensure IHT is not entirely evaded, these trusts are subject to a periodic IHT charge every ten years, and also an exit charge when property exits the fund.

There is still time before the 5th April deadline to have these trusts reviewed.  Provisions are in place to have existing IIP and A&M trusts assessed and amended to avoid these IHT changes.  Any trusts that are not reviewed will be taxed as Discretionary Trusts.

This article has been provided by UK200Group.

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