Inheritance tax deadline approaches
People who have arranged to leave an inheritance to their loved ones through a trust have just two months left to beat new inheritance tax
Back in March 2006 the Government unveiled significant changes to the way some trusts are taxed. It set a deadline of 6 April 2008 for trustees to decide how the trust beneficiaries would receive the money - or risk the trust benefactors being hit with an inheritance tax bill.
One of the main types of trusts to be affected by the new rules are Accumulation & Maintenance trusts.
Traditionally, A&M trusts didn’t allow beneficiaries access to the money until their 25th birthday. But under the new rules, they must be allowed to access the money when they turn 18. If trustees fail to ensure this change is introduced before 6 April then an inheritance tax charge of up to 6% will come into force.
There is a third option – trustees can pass on the money to the beneficiary between their 18th and 25th birthday. However, the benefactor of the trust will still face a maximum inheritance tax charge of 4.2%.
The other trusts affected by the changes are flexible or Interest in Possession trusts. Trustees of flexible trusts, which provide an income for life to a beneficiary, must name the person who will ultimately receive the money before 6 April 2008.
If they fail to do so then the trust will come under a new tax regime and will face periodical charges as well as exit charges for inheritance tax.
At the time it made the changes, the government estimated that 20,000 of the 150,000 A&M and flexible trusts would be affected although some experts warned this could be higher. As the law currently only requires people to pay inheritance tax if their estate (including capital in trusts) is worth more than £300,000, many
trustees may find no changes are needed.
Julie Hutchison, estate planning specialist at Standard Life Assurance, says many trustees have taken a “wait and see” attitude since the changes were first introduced. But with just three months left to make changes, she warns the pressure is on for them to avoid the new tax regime.
Matt Pitcher, wealth adviser at Towry Law Group, agrees that many trustees have not yet taken action because they either hope the government will change its mind or because they are unaware the changes are being introduced.
But with little chance the government will back down, Pitcher says: “Time is running out. If you’ve got a good solicitor then this needn’t be a painful process.”
Pitcher also urges people who have been asked to be trustees to think carefully before accepting, as he says it is a greater responsibility than many realise. He adds: “Trustees must understand their type of trust and its relevant tax regime. That means keeping up with legislative changes and taking their obligation seriously.”
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.