One year left to change your old trust

With the start of the new tax year just over one week away, Standard Life is highlighting that those with certain types of trust will have just one year left to consider making changes to them.

Budget 2006 introduced significant changes to the inheritance tax (IHT) treatment of gifts to certain trusts. The two main types of trust affected were interest in possession trusts (IIP) and accumulation and maintenance trusts (A& M). To allow the trustees of those trusts some time to consider their options, a two year transitional period was created which expires on 5th April 2008. The transitional rules are very different for IIP and A& M Trusts.

FLEXIBLE TRUSTS (INTEREST IN POSSESSION TRUSTS)

In the financial services sector it was predominantly IIP trusts which were used to hold investment bonds and insurance policies, and were often called “flexible trusts”. The opportunity now available for one more year is for the trustees of flexible, or IIP, trusts to consider who is to be the named beneficiary (the technical name for this is the “interest in possession beneficiary”).

Commenting on the opportunity which currently exists, Julie Hutchison, Estate Planning Specialist at Standard Life Assurance Limited said “There is now a one year window left for dealing with this. 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 own children to benefit instead. Taking action to change the beneficiaries before 5th April 2008 means that the trust is not brought into the new regime.”

The new regime is one which could involve ten yearly charges and exit charges for IHT. All gifts to flexible trusts since 22 March 2006 have fallen under this more complex IHT regime.

Julie continued “This area is rather technical and the trustees should take legal advice before acting. Some changes of beneficiary would not be well advised where, for example, the new gift with reservation rules would apply. There are both great opportunities and pitfalls here.”

A&M TRUSTS

A&M trusts were more heavily affected by the Budget 2006 changes since, if they are not altered in a certain way prior to 5th April 2008, then the new regime will apply to them from 6th April 2008 onwards. The main choices for the trustees are to:

Change the age at which the beneficiaries receive capital to age 18 (to escape the new regime and avoid any IHT charge)

Change the age at which the beneficiaries receive capital to age 25 (a halfway house concession created during parliamentary revision of the Finance Bill 2006, which creates a maximum IHT charge of 4.2%)

Do nothing (since the value of the trust means no IHT will arise anyway)

Do nothing (since the value of the trust is significant and it would be inappropriate to reduce the age at which beneficiaries receive funds. The trustees are therefore deciding here that it is better to pay the maximum 6% IHT liability and for the beneficiaries to enjoy the asset protection which the trust gives).

Commenting on A&M Trusts Julie said “A&M trusts were normally bespoke trusts written by a law firm and these were not mainstream trusts for life offices to offer. However, trustees of A& M trusts should keep their eye on the calendar as they only have one year left to consider whether to alter the capital vesting age of the beneficiaries.”

Julie continued “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.”