Inheritance Tax - Types of Trust

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Inheritance Tax - Types of Trust

In the majority of cases, assets can be transferred to a spouse after death without any inheritance tax liability. A 40% tax liability is incurred however on anything over the nil rate band (£285,000 for 2006/7) on the death of the surviving spouse when the estate usually passes to any children. This means that often, although the nil rate band applies to each partner, it is often wasted when the first partner dies.

To get round this problem, many people have set up trusts within their wills which ensure that their estate benefits from the full tax free allowance that both partners are entitled to. A Discretionary Will Trust enables assets up to the nil rate band on the first death to be put into trust for a child or children while ensuring that the surviving spouse has sufficient income.

An Accumulation and Management Trust (A&M trust) is set up usually when children would be too young to take control of their own finances in the event of the death of both parents. This enables the chosen trustees of the fund to look after the money on behalf of the child with access available for needs such as maintenance or education.

An Interest in Possession Trust (IIP) has been a way of leaving assets such as a house to children or grandchildren while giving the surviving spouse the right to continue to live in it for the rest of their life as a 'lifetime tenant'.

Following the March 2006 budget, there have been a number of changes to the tax rules on some trusts, involving tax charges of 20%. This may affect both new trusts set up post March 2006 and many existing A&M and IIP trusts.

It is estimated that as a result of this retrospective legislation, millions of people will have to re-visit their wills or their families may face unexpected tax bills. If you have an existing will which includes a trust, it is very important to get professional help to asses the implications of the new rules. To talk to one of our independent experts, please complete our Quick Enquiry Form and we will arrange for you to be contacted. Alternatively, you can call us on local rate 0845 108 0505.

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