Our March 2006 newsletter highlighted the changes that were to be made to the taxation of trusts under the Government’s Budget Note 25 ‘Aligning the Inheritance Tax Treatment for Trusts’.

The Bill received Royal Assent the summer of 2006 and is now the Finance Act 2007.

What has changed?

The key changes to the original Finance Bill are as follows:

• The amendments relax the form of trust that will qualify for spouse exemption to allow greater flexibility in the use of trust assets. This is especially good news, as many such trusts are set up to provide for a second spouse, whilst also protecting the interests of children from a previous marriage.
• Assets left in trust for a deceased’s children to inherit at any age beyond 18 were to suffer a punitive tax regime. Certain types of trust for children can now retain some favourable treatment, provided that the children must become absolutely entitled to the assets by age 25 at the latest. Up to age 18, the trusts will remain outside of the new tax regime. If the children are to inherit capital at an age later than 18, there will be an exit charge to IHT at a maximum of 4.2%. Many parents may think that this is a price worth paying to delay the age at which a child inherits a substantial fund.
• It is likely that alternative structures can be built into the Will to avoid this 4.2% charge and similar charges.
• The amendments have clarified the rules relating to existing life insurance trusts. It is intended that these trusts will be taxed under the old IHT regime, even where premiums continue to be paid after 22 March 2006 or where the terms of the policy are varied using options that were available in the policy before Budget day.
• Deeds of variation can still be used to change wills within two years of death.

Problems remain in the area of overseas trusts – particularly for people with a US connection – and will trusts for children who are not children of the person who made the will.

What should I do now?

The proposed amendments still leave many people with difficult choices over the destination of their assets, either in life or on death.

It is therefore important that you:

• review your Will
• review any trust which you have set up or where you are a beneficiary
• review any trust where you are a trustee.

There is a strict deadline of 5 April 2008 set out in the proposed legislation for changes to existing trusts. The period up to the deadline will be very busy, so your review should be made sooner rather than later.

Review service

We offer a wills and trusts review service for existing and new clients who are worried about the Budget changes.

Wills

For a fixed fee of £300 plus VAT we will review your Will (mirror wills for husband and wife) in the context of the Finance Act 2006 changes and provide you with written recommendations.

Where we do not already have the information, we will require your will and any codicil(s), a family tree, details of your assets and details of your intentions.

Trusts

For a fixed fee of £600 plus VAT we will review your trust in the context of the Finance Act 2006 changes and provide you with written recommendations.

Where we do not already have the information, we will need all deeds relating to the trust, details of the beneficiaries and the latest trust accounts.

In all cases:

• if we have not already seen client identification for you, we will need to see evidence of your identity in order to comply with Money Laundering Regulations.
• full details of our retainer will be agreed with you before work commences.
• in straightforward cases the fee may be less than the fixed fee, in which case we will tell you before work commences
• in very complex cases the fee may be higher than the fixed fee, in which case we will tell you before work commences

Contact

Please contact your usual client partner or telephone Philippa Rumary on 01865 781000.