The chancellor, Gordon Brown has revised his proposed Budget measures in respect of trusts, following protests by the life assurance industry and MPs amongst others.

HMRC have published additional guidance with the draft Finance Bill, which states that there will be no ‘retrospective tax charges’ to trusts. What the guidance fails to explain is that there will be new charges to certain existing trusts if the terms of the trust are not changed.

All future as well as existing bare trusts are not affected by the changes. An example of a bare trust would be a life insurance policy set up to pay off a mortgage if a person dies, and this remains outside the new rules.

The Finance Bill sets out the details of how the rules for Accumulation and Maintenance (A&M) Trusts and Interest in Possession (IIP) Trusts announced in the Budget, will be applied. Lifetime transfers into accumulation and maintenance trusts or interest in possession trusts have always been exempt from inheritance tax (IHT) if the settlor lived for the next seven years. These trusts have also not been subject to the periodic or exit charges suffered by other trusts.

Legislation has been proposed to make these types of trust immediately chargeable to IHT.

The new rules will apply from 22 March 2006 to new trusts and to additions of new assets to existing trusts. There are transitional provisions which will apply to existing trusts in the period up to 6 April 2008.

The new rules will apply the provisions currently relating to discretionary trusts to both A&M and IIP trusts. So there will be:

• a chargeable transfer on entry with a lifetime rate of 20%;
• a periodic charge of up to 6% every ten years; and
• an exit charge when funds leave the trust between periodic charges.

There will be some limited exceptions to the new rules.

Existing A&M trusts which 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 – the current IHT treatment will continue.

Where the entitlement rules are different, the trust assets will become ‘relevant property’ from 6 April 2008 and the periodic and exit charges will apply.

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. Any subsequent trust will broadly fall to be assessed to the periodic and exit charges.

Where a trust is set up by a will, then the trustees will have two years to alter the terms of the trust to comply with the new rules. In this period any changes they make will be treated as if made in the will itself.

Internet links:

Guidance note and Q & A section