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Finance Act 2006 - Information on Trust changes

Trustees of accumulation & maintenance (A&M) settlements which were already in existence on 22 March 2006, have until 5 April 2008 to reorganise the trusts whilst retaining the benefit of the benevolent pre-22 March 2006 Inheritance Tax rules.

Initially this deadline also applied to trustees of interest in possession (IIP) trusts. The Chancellor in his 2008 Budget on 12 March granted an extension of 6 months to the transitional period for changing beneficiaries under IIP trusts. Trustees now have until 5 October 2008 to reorganise these trusts whilst retaining the benefit of the benevolent pre-22 March 2006 Inheritance Tax rules.

Interest in Possession (IIP) Trusts

IIP trusts in existence on 21 March 2006 will generally continue to enjoy the tax treatment offered by the ‘old regime’ so long as the interest in possession beneficiary(ies) remain unchanged. The trust fund will be in the estate of the interest in possession beneficiary(ies). If however the interests are varied, then the trust will fall within the relevant property regime. This is subject to a transitional relief. Where interests in possession are varied before 6 October 2008, the ‘old treatment’ will continue to apply. The ‘disappointed’ beneficiary must be excluded from all benefit under the trust (otherwise he/she will be treated as having made a gift with reservation).

Albert established a flexible interest in possession trust on 1 October 1998 with a gift of £400,000. The interest in possession beneficiary was his daughter Eunice.


Albert’s gift was a PET and has now become exempt as seven years have passed.


Eunice has worked as a stockbroker for many years and has amassed considerable wealth. She does not wish the trust fund to be included in her estate for IHT purposes. She asks the trustees to exercise their power of appointment in such a way as to give the interest in possession to her daughter Avril. The trustees’ power is exercised on 1 March 2008 and not only is the interest in possession given to Avril but Eunice is excluded from any possible benefit from the trust. The trust fund was worth £600,000 on 1 March 2008.


Eunice has made a PET of £600,000.


The trust does not fall within the relevant property regime.


The trust fund is deemed to be in Avril’s estate.

Accumulation & Maintenance (A&M) Settlements

A&M in existence on 21 March 2006 will fall into the relevant property regime on 6 April 2008 unless the trust is amended to provide that beneficiaries become absolutely entitled to capital on attaining age 18.

An alternative is to change the terms of the trust so that the beneficiaries become absolutely entitled to capital after attaining age 18 but before attaining age 25. Such trusts are known as young person’s trusts (YPTs). YPTs will suffer an IHT charge – similar to the charge on a relevant property trust - on a beneficiary becoming absolutely entitled. As the maximum life of a YPT is seven years, the maximum IHT charge will be (7/10) x 6% = 4.2%. This charge will be proportionately reduced should a beneficiary become absolutely entitled before that age.

It should be remembered that where the trust fund is within the nil rate band, the relevant property regime can be ‘accepted’ without a tax charge.

Additionally it may well be that the tax charge is an acceptable price to pay for the benefit of keeping assets within a flexible trust structure and out of the hands of financially immature beneficiaries.

The examples above are for illustration purposes only and while they highlight some of the opportunities for planning, it should be recognised that they are not an exhaustive description of the opportunities or pitfalls.

The information given is based on our current understanding of taxation laws and practice. These may be affected by future changes in legislation and the individual circumstances of the investor.

                                                                                                                                                                                                                 

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