LONDON (Reuters) - Recent Budgets have introduced sweeping changes to the inheritance tax (IHT) system, due to come into full force on April 6.
Although the doubling of the nil rate band for married couples and civil partners in the pre-Budget report last year fails to save the prudent a penny — as this was already possible through efficient tax planning — huge changes to the rules governing trusts were unveiled in the Budget 2006.
Then Chancellor, Gordon Brown, effectively abolished potentially-exempt transfers (PETs) on the creation of trusts, clipping away the flexibility that once allowed people to skirt around IHT, and sending the IHT planning undertaken by thousands of people into a spin.
The move meant that “interest in possession” (IIP) and “accumulation and maintenance” (A&M) trusts, originally treated as PETs, are now considered to be discretionary trusts and classified as chargeable transfers.
If the transfer is worth more than the IHT nil rate band (currently 300,000 pounds), tax at 20 percent is charged when the trust is created and an additional 6 percent every 10 years.
Following a two-year transitional period, those with the types of trust affected have just two months — until the end of the current tax year — to make changes.
So, what are the options?
* Interest in possession trusts
IIP trusts were mainly used to hold investment bonds and insurance policies, and were often called “flexible trusts”.
Trustees of these trusts should consider changing the named beneficiary before the new IHT regime comes into full force.
Julie Hutchison, estate planning specialist at Standard Life, said: “The great opportunity is for trusts where the trust interest can now be passed down to the next generation.
“This would be ideal where, for example, the existing IIP beneficiary has no requirement for the trust assets and wants his/her own children to benefit instead.
“Taking action to change the beneficiaries before 5 April 2008 means that the trust is not brought into the new regime.”
* Accumulation and maintenance trusts
The main choices for trustees here are to:
— change the age at which beneficiaries receive capital to 18 (to escape the new regime and avoid any IHT charge);
— change the age at which the beneficiaries receive capital to age 25 (a halfway house concession created during parliamentary revision of the Finance Bill 2006, which created a maximum IHT charge of 4.2 percent);
— do nothing, either because the value of the trust is so low that there is unlikely to be any IHT liability or so high that the trustees do not want to reduce the age at which beneficiaries receive access to the funds.
With little time before this year’s Budget in March, there could be another reason to act.
“Anybody intending to pass assets into a trust-based plan is always well-advised to do so ahead of a Budget announcement,” says Paul Wilcox, chairman and technical director for specialist investment manager WAY Group.
“Many taxpayers were caught out in March 2006 when Gordon Brown dramatically changed the ground rules for trusts.
“This time will Alistair Darling increase the seven year run-off period to 10 years? Will he bring in new rules for gifts into bare trusts?
“Such moves increasingly happen without warning, so make hay while the sun shines.”