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Families warned of new trust tax

Families with a popular form of UK trust have just two weeks to reorganise their affairs or they could face a stiff 20% tax hit.

According to law firm Boodle Hatfield, the "life interest trust" charge follows Gordon Brown's 2006 Budget, which has significantly curtailed the ability to create new trusts without an upfront tax charge.

From 6 October, existing life interest trusts will be subject to a 20% tax charge above the nil-rate band of £312,000 if the income beneficiary is changed. Families are therefore being urged to make any alterations ahead of the deadline.

"It has not been possible to create a life interest trust, where a beneficiary has a right to income as it arises, from 22 March 2006 without facing a potential 20% upfront charge to Inheritance Tax, " said Hayden Bailey, a tax planning expert and solicitor at Boodle Hatfield. "The government offered a 'window of opportunity' for trustees of existing trusts to change the beneficiary of such a trust without incurring the charge.  This is the last chance to reorganise existing trusts."

"As part of a wider tax planning strategy, trustees can usually alter the trust terms to give the income to other family members, perhaps grandchildren," explains Hayden. "As long as this change is made before 6 October (and the original beneficiary survives for a further seven years) the entire trust fund will have any Inheritance Tax liability deferred until the deaths of the new beneficiaries, which if grandchildren will hopefully be many years away. The Inheritance Tax hit will have been avoided altogether on the death of the original beneficiary"

If the trustees do not change the trust before 6 October 2008 then this planning will not be possible.  

"If the trustees tried to take the trust income away from the original beneficiary and pay it to, for example, the grandchildren after 6 October, they could have to pay an immediate Inheritance Tax charge of 20% on the value of the entire trust fund," adds Hayden.

"They would also have to pay a 6% tax charge on every 10th anniversary of the trust and also a proportionate charge whenever assets came out of trust."

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