Tech talk

Budget 2006 - Trust Changes - TT26/06

This Tech Talk follows on from Tech Talks 16/06, 17/06, 18/06 in which we outlined the impact of the Budget and Finance (No 2) Bill 2006 and Tech Talk 25/06 which highlighted subsequent amendments to the Bill as it progressed through Parliament.

We understand that the Bill is now entering its final stages and will be debated by the House of Lords on Monday 17th July. It is therefore anticipated that the Bill will receive Royal Assent on either 19th or 20th July.

Some further amendments to the provisions contained in the Bill were announced on 28 June and given the advance stage, it is anticipated that these will be the final changes before it is enacted. These changes are outlined below.

Existing Interest in Possession (IIP) Trusts

Recap

The original proposals stated that for existing IIP trusts ie established before 22 March 2006, the existing rules would continue until the current interest in possession ("the prior interest") came to an end. When the life tenant dies, the value of the trust fund will form part of their estate for IHT purposes and the trust fund will then come within the new provisions under which periodic and exit charges would apply. Transitional provisions would however apply so that if the current interest comes to an end before 6April 2008, either on the death of the life tenant or if there is a lifetime termination, any new interest created will be treated as being in place as at 22 March 2006. The new interest would then be known as a Transitional Serial Interest or "TSI". This gives trustees window of opportunity to rearrange current beneficiaries if appropriate.

Amendment

Initially the above proposals were relaxed so that regardless of when the life tenant dies i.e whether before or after 6 April 2008 and the property remains on trust with the interest passing on to a new life tenant, no periodic or exit charges will apply. The new life tenant will then have a TSI and the value of the trust fund will form part of their estate as under the old rules. However, this amendment only applied to life policies under existing IIP trusts. This was covered in detail in Tech Talk TT25/06.

Under the latest amendment, this will now apply to all interest in possession trusts in existence at 22 March 2006.

It is however also worth noting that this relaxation only applies where person with the "prior interest" dies. A TSI can also arise where a prior interest is terminated before 6 April 2008, for example by the trustees exercising a power of appointment or by the life tenant giving up his/her interest. This will be unaffected by these amendments.

What this means?

Under the original provisions, where a life tenant of a pre 22 March 2006 trust died after 6 April 2008 and his spouse (or civil partner) took over the life interest in the trust, no spouse exemption would have been available and therefore IHT could have been payable. The exemption would only have been available if the spouse / civil partner took the interest absolutely and the trust terminated. This could disadvantage clients on a second marriage for example where the intention is to only give the new spouse a life interest and protect the capital for children of the first marriage. By amending these provisions, successive interests will now be taxed in a fairer way.

Trust for Bereaved Minors

A bereaved minor is a child one of whose parents has died. Favourable tax treatment is available where parents have created trusts for their minor children in their will or for trusts created on intestacy. The definition of parent has now been widened to allow legal guardians to create such trust and favourable tax treatment will still be available.

Disabled Trusts

Trusts created for disabled persons after 22 March 2006 still come within the old regime i.e. any lifetime gift will be treated as a Potentially Exempt Transfer and the value will be deemed to be part of the beneficiary's estate for IHT purposes. The provisions have now been amended to confirm that where a disabled person become entitled to an interest in possession on or after 22 March 2006 but the trust was originally created before that date, the trust assets will be treated as part of the estate of the beneficiary and the new regime will not apply.

As noted above, no further amendments are now anticipated however in the event of any last minute change of plan, we will of course keep you informed.

Liz Henderson - July 2006