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Emma Hatley and Judith Ingham, Partners, Withers LLP.
The Budget press release BN25 entitled 'Aligning the Inheritance Tax Treatment for Trusts' issued in March 2006 caused great consternation in accounting and legal circles. Little was known about the detail of the reform until the Finance (No 2) Bill 2006 (the Bill) was issued on 7 April 2006. The draft legislation confirmed, with few concessions, the Government's intention to go ahead with the draconian proposals set out in BN25. However, the Government tabled amendments on 8 and 9 June 2006 which should mean that fewer people need to radically rethink their estate planning. There remained scope for further amendment between June and the report stage in early July 2006. The Bill is likely to receive Royal Assent in late July 2006.
Accumulation and Maintenance Trust (A and M Trusts)
A and M trusts are special trusts for children/grandchildren, which used to qualify for special inheritance tax status, provided the beneficiaries became entitled to the income by the age of 25 at the latest. The Chancellor's starting point in BN25 was that the only trusts for children which should receive this sort of favoured treatment in the long-term were those which held property which passed to children on the death of a parent and under which the children took capital outright at 18. BN25 proposed a transitional regime under which, if A and M trusts in existence on 21 March 2006 were modified prior to 6 April 2008 so that the beneficiaries had to receive capital at 18, they could similarly continue to receive favoured status while the beneficiaries were under 18.
Though originally the Chancellor seemed resolute in his view that it was appropriate for young people to receive potentially significant sums of money outright at this age, the amendments introduced at committee stage took a small step back from this. For full details see the July  Fam Law.
Interest in Possession (IIP) Trusts
Against the backdrop of the family courts wide discretion to vary settlements or take into account the inherited resources held within them, it is not surprising that donors would choose to settle gifts for their adult children into trust instead of making outright gifts. The old inheritance tax treatment of IIP trusts was the same as that applicable to outright gifts, namely gifts into trust were potentially exempt transfers and no periodic or exit charges applied. The original proposals in BN25 removed the old treatment save in respect of a very limited class of interest trusts established on death.
The June amendments to the Finance Bill mean that full IHT exemption will continue to be available where wills provide for property to be held on life interest trusts for the testator's spouse or civil partner, even where the spouses or civil partners interest is capable of being overridden by powers conferred on the trustees or where that interest is followed by a trust for other individuals. For the full details and implications of the proposals and amendments see July  Fam Law 557.
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