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Individuals who have set up trusts in the past should consider them now to ensure that changes introduced by the Finance Act 2006 do not give rise to inheritance tax (IHT) charges, warns Southampton accountancy firm HWB.

Tracy Jenkins, tax director for HWB, advises people to have their trusts reviewed and any necessary changes made to them before the deadline of 5th April 2008.

She says: “Those people who do not review and revise their trust funds at the start of the new tax year will be subject to an IHT assessment every 10 years, and possibly subsequent taxation.”

The Finance Act 2006 confirmed changes by the government to the treatment of Interest in Possession Trusts (IIP) and Accumulation and Maintenance Trusts (A&M). After 6th April 2008 these are to be treated as Discretionary Trusts for IHT purposes.

Tracy adds: “IIP Trusts entitle beneficiaries to the use of income or enjoyment of the trust fund during their lifetime. If, for example, a deceased wife were to leave property, she could specify that her husband could use the property for his remaining lifetime, before it reverts to her children. For IHT purposes, the husband would have technically ‘owned’ the property and so would be charged up to 40% IHT on his death.

“A&M Trusts allow the trustees to decide which beneficiaries were appointed funds. These have often been used by grandparents to ensure their grandchildren benefited in the most tax-efficient way, as IHT did not restrict the appointment of funds.

“From April 2008 these trusts will come under the Discretionary Trust IHT treatment. Discretionary Trusts, like A&M Trusts, allow beneficiaries to allocate funds wherever they see fit. However, these trusts are subject to a periodic IHT charge every 10 years, and also an exit charge when property exits the fund.

“There is still time before the 5th April deadline to have IIP and A&M trusts reviewed so individuals need to act now.”

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