Trustees of accumulation and maintenance
(A&M) trusts have only a few months
left to make any changes to their terms
which may be necessary to avoid incurring inheritance
tax (IHT) on the trust’s assets. From
6 April 2008, an A&M trust that was
created before 22 March 2006 will be liable
to IHT on assets leaving the trust and the tenyearly
periodic charge on assets remaining in the
trust, unless its terms provide that the assets
will go to a beneficiary absolutely at age 18.
If you baulk at giving absolute ownership of
valuable assets to an 18-year-old, there is
a halfway house. If the trust assets will pass
absolutely to a beneficiary between the
ages of 18 and 25, there will be an exit charge,
but it will be based only on the period
after the beneficiary’s 18th birthday. The
calculation is complicated, but the maximum
possible charge is 4.2% of the value of
the assets, and it will generally be much less than this or possibly even nil.
Trusts under which beneficiaries up to age 25
receive only a life interest in assets will move
to the new IHT regime from 6 April 2008.
As with most trusts created from 22 March
2006 onwards, the trustees will be liable
to the ten-yearly periodic charge. The maximum
tax rate is 6% but it will normally be lower. Where the value of the trust assets
is less than the inheritance tax nil-rate band, currently £300,000,
the periodic charge may be nil. There
will also be exit charges on property leaving the trust.
Trustees should consider their circumstances
well ahead of the 5 April 2008 deadline, as any changes to the trust
deed must be made by that date, and the process
can take some time. The first step is
to determine how much tax the trust might
have to pay under the new regime. You
then have to consider whether avoiding that
tax is worth what could be a risky transfer
of absolute ownership to a beneficiary
aged between 18 and 25. We can advise
you on all the factors that you should consider.
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