Inheritance tax deadline approaches

Piggy Bank

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.”

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