Tuesday, July 04, 2006



The government have made a number of changes to the proposed legislation. These largely relate to inheritance tax on death. As a result we have effectively ended up with two regimes for trusts, one covering lifetime gifts into trust and the second covering gifts on death.

Lifetime Gifts

Subject to the following exceptions, all new trusts are within the discretionary trust regime, i.e. a tax charge on creation, on the10-yearly revaluation and on property leaving the trust.

The exceptions are –

1. Interest in possession trusts (IIP) created before 22 March 2006 remain within the IIP regime until the interest in possession comes to an end – and if it comes to an end before 6 April 2008 and is replaced by an interest in possession in favour of the different person it continues within the IIP regime until the interest of that other person comes to an end.

2. Accumulation and Maintenance trusts created before 22 March 2006 remain within the old rules but up to 6 April 2008 only. They will continue to qualify for their current treatment after 5 April 2008 if they are amended by that date to reduce the age at which the beneficiary attains his interest in possession to 18 and gives him an absolute entitlement to the assets (and any accumulated income) at age 18.

3. The existing rules on special types of trusts (trusts for the benefit of employees, newspaper trusts, protective trusts, and trusts for disabled persons, are unaffected even where the trust is set up after 22 March 2006).

4. The special rules that apply to trusts for disabled persons will also apply to a trust set up after 22 March 2006 by the disabled person himself for his own benefit.

Gifts on Death

The current interest in possession rules will continue to apply to the following types of trusts where the trust is a Will trust (including one created by a variation of the Will) or a trust arising on intestacy.

1. Trusts for a bereaved minor, i.e. a trust created by a parent for an infant child under which the child will become beneficially entitled to the assets (and any accumulated income) at age 18.

2. Age 18- to-25 trusts, i.e. a trust that would have qualified as a trust for a bereaved minor but for the child becoming absolutely entitled to the property at some age between 18 and 25. There is an exit charge where property leaves such a trust. This is broadly the same as the exit charge that would have applied had the trust been a discretionary trust created (by the deceased parent) on the child’s 18th birthday.

3. Trusts with an immediate post-death interest, i.e. an interest in possession, which came into effect on the death of the deceased person. This preserves the exemption for a gift of an interest in possession to the surviving spouse (or civil partner). However it is not limited to such gifts; it will apply to an interest in possession in favour of anyone.

All other Will Trusts will come within the discretionary trust regime.


The strategy for Wills is likely to become –

a) A trust for the surviving spouse (or civil partner) should be an interest in possession trust with power to advance capital to the spouse or to pay capital to a second class of beneficiary. There will then be no IHT on the death and any capital appointed to someone other than the spouse will constitute a potentially exempt transfer by the surviving spouse (or civil partner) so there will be no IHT if the spouse survives for seven years after the appointment.

b) Assets put into trust for an infant child should go into a trust for a bereaved minor or an age 18-to-25 trust provided that it is intended that the child should become entitled to the assets at or before age 25.

c) If, as is likely to be normally the case, it is not wished to give an infant the assets at age 25 then a discretionary trust should probably be used. There is no charge on creating such a trust by Will (as IHT already has to be paid on death where the assets go to someone other than the surviving spouse or civil partner and no trust creation charge will arise in addition) so the only additional IHT will be the 10-yearly charge and exit charge, which could well be acceptable if the child is to take the assets at say, age 35.

d) Trusts for adult children should be discretionary trusts. Again there is no trust creation charge. Depending on the age of the child, the total 10-yearly charges and exit charge may well be less than the 40% that would be payable on the child’s death.

e) Trusts for other people who would in the past have been given a life interest should probably now be discretionary trusts.

The amendments do not affect the thoughts set out in Blog 27, which dealt solely with lifetime trusts.

Robert Maas