Recent Changes to British Trust Legislation

Tim Cook of Wilder Coe Chartered Accountants explains the recent changes to British trust legislation and how this impacts on Expats’ inheritance tax planning.

Recent months have seen dramatic changes to trusts and inheritance tax law, and the ongoing amendments and U-turns since the first announcements have not helped clarify the situation.

However now the rules have been finalised it’s vital that Expats are fully aware of them in order to help mitigate their Inheritance Tax (IHT) liabilities.

There are basically four types of trusts. Firstly Bare Trusts are used to make gifts to minors when the child is not 18. The treatment of these trusts has not changed.

Interest In Possession Trust (IIP) are used where you want to give the income from some assets to someone but the capital at another time or to someone different. These are now chargeable at 20% if the amount given including any chargeable gifts in the previous seven years exceeds the nil rate band (£285,000). Additionally a charge will arise at a maximum rate of 6% every ten years on the value of the trust in excess of the nil rate band. There is also an exit charge.

Accumulation and Maintenance trusts used to be known as Privileged Trusts, as there used to be no IHT on setting up the trust, no IHT during the trusts life and no IHT on the final distribution. These trusts were used by either parents or grandparents for children who were under 25 when the trust was created. The only criteria was that at the age of 25 the beneficiaries became entitled to the income of the trust as it arose as of right. Unfortunately this has changed, but putting it into perspective is important. There is still no IHT on the setting up of these trusts so long as the beneficiaries become entitled to the capital at age 25. If the beneficiaries do not become entitled to the assets until 25 there will be an IHT charge at a maximum of 4.2% on the value of the trust assets above the nil rate band on exit.

Finally Discretionary trusts, as the name implies are where the trustees have complete discretion over both the income and capital of the trust with no restrictions. There is a charge at 20% on the value of assets settled, above any available nil rate band when the trust is setup. During the trust’s life, a ten year anniversary charge arises at a maximum of 6% on the value of the trust above any available nil rate band. The rules applying to these trusts have not changed.

It is not only stand alone trusts which are affected, but also those trusts which are created as part of a Will.

Many people who are married with children leave the balance of their estate after specific gifts to a surviving spouse outright or in trust for children until they are 18. In this scenario the rules have not altered. However if the children do not inherit until over 18 but under 25 and the spouse does not survive, there is an immediate charge to IHT as before, then in relation to children’s trust maximum IHT there is a charge of 4.2% on distribution.

If the spouse dies before the Will creator and the children do not inherit until after 25 there will be the immediate charge to IHT followed by tax in relation to children’s trust taxed as a discretionary trust.

If the assets are left in trust for the surviving spouse for the remainder of their life and then on trust for children until 25, there is no change until the death of spouse. If children do not inherit until after 18 but before 25, once again there is an IHT charge at 4.2%. This charge is the same if there is no spouse and the trust is left directly to the children if they inherit over 18 but under 25.

For balances left in trust for children for life, followed by grandchildren there is no charge during children’s lives or on their deaths. The trust left for grandchildren is taxed as a discretionary trust

There is no change to the rules for any money left in Trust for a charity.

Despite the changes and complications Trusts continue to be a useful planning tool. The rules have changed but in reality they may not effect your planning. Ask yourself the following:

• Would you be prepared to give assets to a child or grandchild at 18? If so nothing has changed
• Would you be prepared to give assets to a child or grandchild at 25? If so there is a maximum 4.2% tax on the value of the trust fund.
• If you would not give assets to children until after 25, there is a maximum IHT charge of 20% on the excess assets over the available “nil rate” band which is currently £285,000 when the trust is setup together with a maximum charge of 6% every ten years and on distribution.

For more information call 020 7724 6060