Changes to the trust regime were announced in the Finance Act 2006 and took effect from 6 April 2008. Discretionary trusts remain unaffected by the changes; there is a charge on creation of the trust, a charge on the ten year anniversary and a charge on capital distributed from the trust.
Interest in possession trusts already in existence, will continue to be taxed under the current regime during the life tenant's lifetime.
Accumulation and maintenance trusts will be taxed in the same way as discretionary trusts. It will no longer be possible to gain exemption from inheritance tax on the creation of an A&M trust.
What should be done to mitigate the effects of these changes? Insurance is a possibility, or changing the structure of investments, so that 100% Business Asset relief is available. AIM listed investments or funds would fulfil these requirements.
The often overlooked relief for regular gifts out of income could be used. This has no limit, so long as the donor's standard of living is not affected and the gift comes out of income and not capital.
The deceased spouse's nil rate band is available to the extent that it remains unused, on the death of the surviving spouse.
Example: Hannah dies in May 2008, leaving an estate of £800,000. Louis, her husband, died in March 2003, leaving his estate of £125,000 to his children.
Hannah's estate will have the benefit of her own nil rate band for 2008-09 of £312,000. In addition, she will have the benefit of the unused portion of the nil rate band available when Louis died. The band then was £250,000 of which his estate used 50%. Hannah's estate will thus have the benefit of 50% of £312,000 ie £156,000 in respect of her late husband's death.