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Guide for Inheritance Tax Changes to Trusts

What Trusts are affected?

Discretionary Trusts
One of the most popular forms of trust used for inheritance tax planning has been the Nil Rate Band Discretionary Trust.

This involves leaving a legacy equivalent to the Nil Rate Band of inheritance tax – presently £325,000 – to  Trustees to be held on discretionary trusts for the benefit of the surviving spouse, children etc.

If your Will contains such an arrangement, no urgent action is necessarily required. Discretionary trusts are unaffected by the proposed changes in the legislation. However, your Wills should be reviewed to see whether it is appropriate to simplify them – it isn’t in all cases.

Accumulation and Maintenance Trusts
Accumulation and maintenance trusts are normally made for the benefit of children or grandchildren, and can be very simple, for example, ‘to my (grand)children on them attaining the age of 21/25 etc’.  Under the new legislation, such trusts will now be subject to inheritance tax charges every 10 years, and when the beneficiary attains the specified age. The only exceptions to this is under Wills where a parent has died and the Will specifies that the ‘bereaved minor’  becomes absolutely entitled on attaining the age of 18. There is no such exception where the trust arises under a grandparent’s Will.

If your Will provides for your children or grandchildren to inherit at an age greater than 18, it will be sensible to review the provisions of the Will.

Existing accumulation and maintenance trusts – whether arising under a Will of a person who has died or by lifetime deed – should be reviewed by the Trustees to familiarise themselves with the new rules.

Interest in possession Trusts
Interest in possession trusts – sometimes referred to as life interest trusts – are often used in Wills and generally involve a trust ‘to pay the income of the trust fund to my wife/husband for life and after her/his death to our children’. Trusts giving the right to occupy a house also fall under this heading.

This sort of trust is often used to ensure that assets pass to the children on the surviving spouse’s death, and is now known as an Immediate Post-Death Interest (IPDI).  All life interest trusts, other than IPDI trusts, are likely to be affected by the new legislation.  

All trusts set up by lifetime gift and all Wills which include a life interest trust should be reviewed.

Summary
Clients should check their Wills or any other trusts which may have been made to establish if they are likely to be affected by the above changes. This is likely to be the case if:

You may also wish to review your financial affairs generally to see if your estate is likely to exceed £325,000: the present limit for inheritance tax (2009/10). It is still possible to save considerable amounts of inheritance tax with appropriate planning.

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Trevor George

Partner
T: 03700 86 3200
I: +44 (0)1604 54 3200
E: trevor.george@shoosmiths.co.uk