Money Matters - Autumn 2007

Time runs out for trustees’ IHT advantage

Photo: Family with piggy bankTrustees of accumulation and maintenance (A&M) trusts have only a few months left to make any changes to their terms which may be necessary to avoid incurring inheritance tax (IHT) on the trust’s assets. From 6 April 2008, an A&M trust that was created before 22 March 2006 will be liable to IHT on assets leaving the trust and the ten-yearly periodic charge on assets remaining in the trust, unless its terms provide that the assets will go to a beneficiary absolutely at age 18.

If you baulk at giving absolute ownership of valuable assets to an 18-year-old, there is a halfway house. If the trust assets will pass absolutely to a beneficiary between the ages of 18 and 25, there will be an exit charge, but it will be based only on the period after the beneficiary’s 18th birthday. The calculation is complicated, but the maximum possible charge is 4.2% of the value of the assets, and it will generally be much less than this or possibly even nil.

Trusts under which beneficiaries up to age 25 receive only a life interest in assets will move to the new IHT regime from 6 April 2008. As with most trusts created from 22 March 2006 onwards, the trustees will be liable to the ten-yearly periodic charge. The maximum tax rate is 6% but it will normally be lower. Where the value of the trust assets is less than the inheritance tax nil-rate band, currently £300,000, the periodic charge may be nil. There will also be exit charges on property leaving the trust.

Trustees should consider their circumstances well ahead of the 5 April 2008 deadline, as any changes to the trust deed must be made by that date, and the process can take some time. The first step is to determine how much tax the trust might have to pay under the new regime. You then have to consider whether avoiding that tax is worth what could be a risky transfer of absolute ownership to a beneficiary aged between 18 and 25. We can advise you on all the factors that you should consider.