Inheritance tax changes to trusts - Finance Bill 2006

Radical changes to inheritance tax

The Budget 2006 introduced unexpected and radical changes to the inheritance tax (IHT) regime for trusts, with effect from 22 March 2006. Whilst many consider that trusts are used only in exceptional cases, in reality, trusts have become important for many relatively affluent individuals in planning their wealth and are often the underlying component of wills and many investment products.

Whilst there were some amendments to the original Budget 2006 proposals during the Finance Bill's passage through Parliament many of the original proposals put forward in the Budget have now been enacted.

Under the new rules, transfers to nearly all new trusts and additions of assets to existing trusts will be subject to IHT. IHT will be payable on transfers into and out of the trust, and on every ten year anniversary of the trust's creation. Anyone considering creating a new family trust or adding to or making distributions from existing trusts should seek advice on the possible impact of these proposed changes. Furthermore all but the most simple of wills should be reviewed.

The new rules also impact settlements made in the context of marriage or civil partnership breakdown and new life assurance policies written into trust.

There is some concern that the changes might reflect the start of a harsher IHT landscape going forward making it advisable to decide on a prudent action plan now for reducing the present and future exposure to IHT. With the options for mitigating tax on non-business assets significantly reduced, it is more critical than ever to plan early and to preserve or bank the 100% relief available on qualifying business and agricultural assets including unquoted shares, family businesses and shares quoted on the Alternative Investment Market (AIM).