Budget 2008: IHT planning opportunity

The Finance Act 2006 made sweeping changes to the taxation of Trusts and a transitional period was introduced allowing the Trustees affected by these changes time to alter the trusts to take advantage of transitional rules before the new rules became effective. An extension to this transitional period, to 5 October 2008, for certain Trusts was announced in the Budget 2008.

The extension only applies to what are commonly known as Interest in Possession (or Life Interest) Trusts. These Trusts give one or more persons a right to receive the income (or to enjoy a non-income producing asset - such as the right to live in a property rent free) but without any entitlement to the underlying capital.

This extra time was granted because it was previously unclear whether the termination of an Interest in Possession which was replaced by another Interest in Possession for the same individual would result in an immediate charge to Inheritance Tax. It has now been confirmed that there will not be a charge to Inheritance Tax in these circumstances provided that the change is made before 5 October 2008.

This may provide an opportunity for Trustees to alter the trusts so that the assets remain out of the potentially more costly Relevant Property regime (under which Inheritance Tax can be payable at 6% on the Trust assets every 10 years and on capital distributions) for a longer period of time.

It may also be worthwhile considering a transfer of assets from an Interest in Possession Trust for the current beneficiary (if perhaps he is over 50) to an Interest in Possession Trust for his son or daughter (perhaps in their 20's). Another possibility would be a change to the trusts to defer the age at which the beneficiary receives capital. It may be advantageous for the beneficiary to receive the capital at a later age than 25 (if that is the current qualifying age) or for the capital to be retained by the Trustees during his lifetime. This can be achieved free of Capital Gains Tax and Inheritance Tax (if the transferor survives for seven years) whereas after 5 October 2008 there will be a potential Inheritance Tax charge at 20% on such a transfer.

However, whether the Trustees will be able to take advantage of the extra time will depend on the terms of the Trust and whether the Trustees have sufficient flexibility to alter the Trusts.

If you wish to discuss any aspect of the above then please contact Jeremy Tucker on 01604 233233 or email jeremytucker@hewitsons.com or any other member of the Private Client team.