New inheritance tax rules
May 2006
The chancellor, Gordon Brown has revised his proposed
Budget measures in respect of trusts, following protests
by the life assurance industry and MPs amongst others.
HMRC have published additional guidance with the draft
Finance Bill, which states that there will be no ‘retrospective
tax charges’ to trusts. What the guidance fails
to explain is that there will be new charges to certain
existing trusts if the terms of the trust are not changed.
All future as well as existing bare trusts are not
affected by the changes. An example of a bare trust
would be a life insurance policy set up to pay off
a mortgage if a person dies, and this remains outside
the new rules.
The Finance Bill sets out the details of how the rules
for Accumulation and Maintenance (A&M) Trusts and
Interest in Possession (IIP) Trusts announced in the
Budget, will be applied. Lifetime transfers into accumulation
and maintenance trusts or interest in possession trusts
have always been exempt from inheritance tax (IHT)
if the settlor lived for the next seven years. These
trusts have also not been subject to the periodic or
exit charges suffered by other trusts.
Legislation has been proposed to make these types
of trust immediately chargeable to IHT.
The new rules will apply from 22 March 2006 to new
trusts and to additions of new assets to existing trusts.
There are transitional provisions which will apply
to existing trusts in the period up to 6 April 2008.
The new rules will apply the provisions currently
relating to discretionary trusts to both A&M and
IIP trusts. So there will be:
- a chargeable transfer on entry with a lifetime
rate of 20%;
- a periodic charge of up to 6% every
ten years; and
- an exit charge when funds leave the
trust between periodic charges.
There will be some limited exceptions to the new rules.
Existing A&M trusts which provide that the assets
in trust will go to a beneficiary absolutely at 18 – or
where the terms on which they are held are modified
before 6 April 2008 to provide this – the current
IHT treatment will continue.
Where the entitlement rules are different, the trust
assets will become ‘relevant property’ from
6 April 2008 and the periodic and exit charges will
apply.
The current rules for existing IIP trusts will run
on until the interest in the trust property at 22 March
2006 comes to an end. Any subsequent trust will broadly
fall to be assessed to the periodic and exit charges.
Where a trust is set up by a will, then the trustees
will have two years to alter the terms of the trust
to comply with the new rules. In this period any changes
they make will be treated as if made in the will itself.
Internet links:
Guidance
note and Q & A
section
Top
|
