A new course for tax planning schemes
Taxing trusts
Could popular tax planning schemes die a slow death following the chancellor’s decision to impose a tax charge on trusts commonly used to
mitigate inheritance tax (IHT)?

In Budget 2006 Gordon Brown announced new rules on “accumulation and maintenance” trusts, commonly used for school fees, and “interest in possession” trusts, used to pass wealth down through the generations. Other trusts, such as “nil-rate band discretionary trusts” are unaffected by this latest clampdown.

Under the rules, people will have to pay tax on trusts when they are set up if the value of the trust is higher than the nil-rate band for inheritance tax (£285,000 in the current tax year).

In addition, a further 6 per cent tax charge will be levied on these trusts on every 10th anniversary after they were created as well as a 6 per cent exit charge. The measures will apply to trusts set up in the future and existing ones from 2008.

The only way to avoid the tax charge under the new rules is to allow children control of the assets at age 18, which would be an irresponsible solution.

The inability to make new lifetime trusts for children and grandchildren without a 20 per cent charge on the value in excess of the nil-rate band, means that families will be forced either to make outright gifts at a point where the receipt of wealth could seriously deflect children and young adults from their studies, or to make no gifts at all.

Those who have already set up trusts for family members may simply have to reduce the age limit in order to avoid the tax charge. Once you have set up a trust there is very little you can do to change it.

Direct gifts to children can still be made free of an immediate IHT charge through a potentially exempt transfer but those who wished to protect their children from being able to spend the capital via a trust could be faced with an immediate and significant tax liability.

Levels and bases of, and reliefs from, taxation are subject to change.

Article date: May 2006