Historically there were three different types of tax regime for Trusts:

• Interest In Possession Trusts

• Discretionary Trusts

• Accumulation and Maintenance Trusts

Legislation in the 2006 Finance Act attempts to merge the Inheritance Tax (IHT) implications for these Trusts, which will also have a bearing on Capital Gains Tax (CGT).

From 22 March 2006 all new and existing Discretionary Trusts and any new Accumulation & Maintenance Trusts will be within the 'relevant property' regime.

Relevant Property Trust

1. Capital Gains Tax

There will be a charge to CGT on a lifetime gift of 'relevant property' into the trust, but the transaction may be eligible for Holdover Relief (except in 'settlor interested' trusts) under s260 TCGA 1992. ('Settlor interested' Trusts are those in which the settlor may be a beneficiary - however small.)

Holdover Relief will not apply to the new IHT rules for Trusts created for Bereaved Minors, or Age 18-25 Trusts.

There could also be a charge to CGT if the Trustees sell any of the Trust assets. This is the same as if an individual sold assets. The tax rate is currently 40%. The annual exemption available is a maximum of £4,600 for 2007/08.

There may be a charge to CGT on appointing the capital to the beneficiary although this may also be the subject of a Holdover Relief claim.

2. Inheritance Tax

From 22 March 2006 there will be an IHT charge of 20% on lifetime gifts into Relevant Property Trusts although Business Property Relief and the IHT threshold of £300,000 for 2007/08 could reduce this to nil.

There will also be a charge to IHT on the trust of up to 6% of the fund value every 10 years, payable by the Trustees. This charge will be eligible for Business Property Relief (if still available) and the IHT threshold, if appropriate.

An exit charge will also apply when assets leave the trust fund.

New Interest in Possession Trusts

The previous IIP rules will continue to apply where a beneficiary becomes entitled to an immediate post-death interest in possession, which is created on or after 22 March 2006 on the death of the testator, and the Trust is not for a bereaved minor or a disabled person. The value of the property in the Trust will then be chargeable to IHT on the death of the life tenant.

Following the death of the first life tenant the property will move into the 'relevant property' regime if it continues in Trust. This will, at least, preserve the exemption on the death of the first spouse or civil partner.

A lifetime transfer into an IIP Trust in any other circumstances will be 'relevant property'.

Bereaved Minors Trust

From 22 March 2006 a Bereaved Minors Trust will be a special type of Accumulation & Maintenance (A&M) Trust, provided that it is only created on death by a parent - or the Criminal Injuries Compensation Board - for a minor child who will become absolutely entitled to the assets at age 18.

Where this is the case there will be no 10 year charges or exit charge payable by the Trustees.

Disabled Persons Trust

A Trust created in the settlor's lifetime, or on death, for a disabled person (see s89(4) IHTA) will also continue to receive special treatment.

Lifetime gifts into these Trusts will still be a potentially exempt transfer (PET). There will be no 10 year charges or exit charge payable.

It will now be possible for an individual to create a Trust for their own anticipated disability, but the requirements are quite specific.

Age 18 - 25 Trusts

This is a Trust which has been created in circumstances similar to a Bereaved Minors Trust for a person who is not yet 25, has lost one or both parents, and becomes entitled to the assets by age 25.

No IHT will be payable if the Trust property leaves the Trust before the beneficiary becomes 18. There will be a charge to IHT if the assets leave the Trust when the beneficiary is between 18 and 25. The maximum charge will be 4.2% of the assets.

Existing A&M Trusts

Where an A&M Trust existing at 22 March 2006 provides for the assets to go to the beneficiary absolutely at age 18, or the terms of the Trust are modified before 6 April 2008 to provide for this to happen, the previous special IHT rules will continue.

Where this is not the case the Trust assets will effectively become 'relevant property' from that 6 April 2008.

Similar rules to the Age 18-25 Trust will apply to an existing Trust if the beneficiary becomes absolutely entitled to the assets by age 25.

Existing IIP Trusts

The previous rules will continue to a apply to IIP Trusts existing at 22 March 2006 while there is no change in the Trust provisions and the existing interest in the Trust property continues. Once that interest comes to an end, if the funds then continue in Trust, it will be necessary to consider whether the funds have then become relevant property' under the new rules referred to previously.

Where there is only one change of life tenant between 22 March 2006 and 5 April 2008 the current rules will continue.

The old rules will also continue where a previous interest in an IIP existing at 22 March 2006 comes to an end on or after 6 April 2008 and that life interest passes to the spouse or civil partner of the previous life tenant.

Otherwise Trust property is likely to become 'relevant property' where there is a change of life tenant after 5 April 2008.

Existing Life Assurance Policies

The Government did say that life policies written into Trust prior to the 22 March 2006, in which there is an existing life interest, should not be affected by these new rules.

Furthermore the transitional rules for A&M Trusts referred to above should not be affected by the payment of premiums after 22 March 2006.

Existing policies written on Discretionary Trusts will not be affected.

Potentially Exempt Transfers

From 22 March 2006 PETs can only be made by either a gift to another person or into a Disabled Persons Trust.

Conclusion

If you are a Trustee of an existing A&M or IIP Trust set up prior to 22 March 2006 you should review the provisions of the trust to ensure that any modifications required are in place before 6 April 2008.

If you are a Trustee of a Discretionary Trust, now may be the time to consider whether any changes are required to the terms of the settlement.

If your current Will includes any provision for funds to be settled on Trust you should review it to ensure that any required modifications are incorporated.

If you are in any way concerned about the effect these new rules may have on your life assurance policies or investment bonds you should consult your policy provider or financial adviser.

Remember that there can be CGT, as well as IHT, issues on transferring assets into or out of a Trust.

Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from this firm or other suitably qualified person or practice.