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Trusts sheltering family assets are hit

THE UK Chancellor has imposed a devastating stealth tax on trusts commonly used to mitigate inheritance tax (IHT) and pass wealth down through the generations.

Couples using two specific types of trust to provide them with flexibility on IHT planning face paying hefty charges based on the assets held in trust for future generations. The legislation affects existing, as well as new trusts, and could cost families hundreds of thousands of pounds.

Accumulation and maintenance (A&M) trusts, and interest in possession trusts (IIP) are both affected. The former is primarily used for parents and grandparents to protect assets, as capital is held in trust and passed to children or grandchildren when they reach 25. At present, there is no charge on such trusts.

However, the proposals would result in these trusts paying a six per cent charge every 10 years, based on the value of the assets in the trust. If people tried to slim down the value of the assets to reduce the charge, they will pay a so-called “exit charge”. Any new assets being put into the trust to reduce an IHT liability would face a 20 per cent “entry” charge.

An interest in possession trusts, currently entitles the beneficiary to income from that trust for life, and is commonly used with a flexible deed that can allow the trustees to amend these wishes. It is usually used by surviving spouses to maintain the ability to mitigate IHT after the first spouse’s death. Now, the same charges would apply.

The Revenue & Custom’s proposals will prevent the assets in the trust from being exempt from IHT on the second death.

Leading UK tax planners have described the measures as a “bombshell”, which had not been discussed as part of extensive consultation on changes to trust law. It appears the only exceptions to these charges would be if you have set up the trust for a disabled beneficiary, or you give the rights to the capital, within the trust, to the beneficiaries at age 18. However, it is likely that people will not want to do that, as the feeling is children/beneficiaries are more mature at age 25, protecting against bad marriages, for example. In summary, our view is that, as things stand, this is nothing short of disastrous.

IIP trusts are commonly used when people write their wills, and the Chancellor trumpeted the questionable fact in his Budget, that 94 per cent of estates do not pay IHT.

Yet, this move will undoubtedly increase the number of estates hit by IHT and bump up the Revenue’s coffers. This is obviously the purpose behind the changes.

IHT revenue has doubled since Labour came to power in 1997, largely because of property inflation outstripping the increase in the nil rate band, which is currently 275,000 pounds sterling, rising to 285,000 pounds sterling on, or after, April 6, 2006. Everything above this level is subject to 40 per cent tax, and the Revenue expects to receive three billion pounds sterling in IHT for the first time this year.

Senior financial planners have stated that this move is hugely damaging to trusts and includes all life policy trusts, for example, loan trusts and discounted gift plans.

It appears that Gordon Brown is intent on hitting middle England’s legitimate attempts to mitigate the savage impact of tax on death, and this unexpected change should do the job very well for him.

Therefore, anyone who has settled a trust, or intends to, should consider their options very carefully. If these proposals become law (which looks likely), then any UK domiciled persons will need to consider the tax consequences before setting up a trust, particularly where the amount exceeds 275,000 pounds sterling. Also remember that you do not lose your domicile just by leaving the UK. So this change can, and probably will, affect most expatriates living outside of the UK.

It is important that you seek proper advice on these matters as early as possible.

Contributed by


Managing Director,

Blacktower Financial

Management Limited