Good way of putting money in trust for children or Grandchildren can be used to provide school fees at some future date or any other purpose that the trustees are empowered.

If you have set up such a trust or intend doing so you should seek advice in the light of the 2006 Budget which has some important changes. 

Who is likely to be affected?

1. People who have set up, or have an interest in, “accumulation &
maintenance” trusts (A&Ms) and/or “interest in possession” trusts (IIPs)
that do not meet new inheritance tax (IHT) rules about their terms and the
circumstances in which they are created.
General description of the measure
2. This measure refines the current IHT rules for A&Ms and IIPs. Trusts of
this type that currently receive special treatment but do not qualify under
the new rules will come within the mainstream IHT regime for “relevant
property” trusts. This change will apply also to existing A&Ms and IIPs,
subject to the transitional rules described below.
Operative date
3. The new rules will apply on and after 22 March 2006 to new trusts,
additions of new assets to existing trusts and, subject to transitional
provisions, to other IHT-relevant events in relation to existing trusts.
Transitional rules will provide for a period of adjustment for certain existing
trusts up to 6 April 2008, and for continuing exclusion from the “relevant
property” charges if they satisfy conditions for ongoing protection.
Current law and proposed revisions
4. Part III, Chapter III Inheritance Tax Act 1984 (IHTA) provides a specific
regime for “relevant property” trusts – broadly, those trusts in which no
person has an interest in possession. It combines:
· an immediate “entry” tax charge of 20% on lifetime transfers that
exceed the IHT threshold into “relevant property” trusts;
· a “periodic” tax charge of 6% on the value of trust assets over the IHT
threshold once every ten years; and
· an “exit” charge proportionate to the periodic charge when funds are
taken out of a trust between ten-year anniversaries.
Budget 2006
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5. There are special rules for A&M trusts (section 71 IHTA) and IIP trusts
(Part III, Chapter II IHTA). Lifetime transfers into these trusts are exempt
from IHT if the settlor survives seven years, and the trusts are not subject
to the periodic or exit charges.
6. Legislation in the Finance Bill will limit these special rules to trusts that:
· are created on death by a parent for a minor child who will be fully
entitled to the assets in the trust at age 18; or
· are created on death for the benefit of one life tenant in order of time
whose interest cannot be replaced (more than one such trust may be
created on death as long as the trust capital vests absolutely when the
life interest comes to an end); or  are created either in the settlor’s lifetime
or on death for a disabled person (see section 89(4) IHTA).
Any other trusts will fall into the mainstream IHT rules for “relevant
property” trusts.
New trusts
7. In the case of trusts created on and after 22 March 2006, this means that
lifetime transfers into trusts are no longer eligible for special treatment
unless they are set up for a disabled person. All other transfers will be
immediately chargeable. Trusts that do not qualify for special treatment –
whether they are created in life or on death – will be liable to the periodic
and exit charges applying to “relevant property” trusts.
Existing A&M trusts
8. Where existing A&M trusts provide that the assets in trust will go to a
beneficiary absolutely at 18 – or where the terms on which they are held
are modified before 6 April 2008 to provide this – their current IHT
treatment will continue.
9. Where they do not, the trust assets will become “relevant property” from 6
April 2008 and the periodic and exit charges will apply. Ten-yearly
anniversaries will arise by reference to the original date of settlement. For
the first ten years after 6 April 2008, the rate of charge will reflect the fact
that the property has not been “relevant property” throughout a full tenyear
period. For example, if the first ten-yearly anniversary falls in
November 2008, it will be one twentieth of the normal charge.
Existing IIP trusts
10. The current rules for existing IIP trusts will run on until the interest in the
trust property at 22 March 2006 comes to an end. If someone then takes
absolute ownership, this will be a transfer by the person with the interest in
the property – either a transfer on death or a “potentially exempt transfer” if
they are still living – and will receive the same IHT treatment as now. The
trust will have no further IHT consequences.
11. If the interest comes to an end so that the property remains on trust, this
will be treated as the creation of new settled property;
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· if it comes to an end during the lifetime of the person beneficially
entitled to it, this will be a transfer creating “relevant property” (unless
the new trusts are for charitable purposes) and will therefore be
immediately chargeable; and
· if the interest comes to an end on death, it will form part of the person’s
IHT estate as now and the settled property will then become “relevant
property” (unless the charity exemption applies).
In both cases, the periodic and exit charges will apply.
12. However, any new IIP that arises when an IIP created before 22 March
2006 comes to an end before 6 April 2008 – whether on death or
otherwise – will be treated as an IIP that was in place on 22 March 2006.
Gifts with reservation
13. Where an individual is beneficially entitled to an interest in settled property,
and continues to be treated for IHT purposes as owning the property, a
termination of the interest in the individual’s lifetime on or after 22 March
2006 will be treated as a gift for purposes of the IHT “gift with reservation”
rules. So if they retain the use of the settled property after their interest in
it ends, it will remain chargeable in their hands in the same way as if they
had formerly owned it outright.
Capital gains tax consequentials
14. Changes to the IHT treatment of trusts will have a number of implications
for CGT:
· transfers into and out of trusts that will now come within the “relevant
property” rules will automatically be eligible for hold-over relief under
Section 260(2)(a) Taxation of Chargeable Gains Act 1992 (TCGA);
· hold-over relief under Section 260(2)(d) TCGA will be restricted to
trusts that meet the new IHT rules for trusts for minor children;
· the special rules in Section 72 and Section 73 TCGA relating to the
death of a person entitled to an IIP will be restricted to assets that are
subject to an IIP which meets the new IHT rules.
Further advice
15. If you have any questions about the changes, please contact the
Probate/IHT Helpline on 0845 3020 900. Information about Budget
measures is available on the HM Revenue & Customs website at
www.hmrc.gov.uk