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NEW TRUSTS: Lifetime Tax Planning

References are to the IHT Act1984 unless stated otherwise

Introduction to Presentation

Much has been said and written about the changes to the taxation of Trusts post 21 March 2006. Much time has been devoted to the rights and wrongs of the change in policy. That is not for today's discussion. The dust has now, to a large extent, 'settled'. Our focus needs to be on where we go from here. Given the complexity of the rules, today we will focus only on new trusts, i.e. those created post 21 March 2006.

The reality for most accountants in general practice is that, not only has there never been a better time to discover how to use trusts in IHT planning, but clients will soon be bombarded with information from competitor firms extolling the virtues of family trusts. In short, tell your clients before someone else does!

Today's presentation focuses on the majority of clients in most practices; UK resident and UK domiciled individuals. A considerable number of courses have been devoted to the 'more sexy' areas of off-shore trusts and the use of trusts by individuals whose place of domicile is situated outside the UK. Today's presentation focuses on UK resident and domiciled individuals who do not have the same freedom to avoid UK inheritance tax as do non-resident individuals (potentially liable to IHT on assets situated in the UK) and resident but non-domiciled individuals able to exploit the so-called 'excluded property' provisions for assets situated both here and overseas.

Of course, the majority of clients are in business and the majority of their wealth is tied up in those businesses (apart from the family home) and the IHT Business Property Relief (or/and Agricultural Relief) may reduce the current IHT exposure to Nil on those assets. Accordingly, many clients are not interested in IHT planning but that does not mean they should not be. What happened when they dispose their business interests and retire? Could the use of a Trust help the situation? May be, may be not, but practitioners need to be able to judge what is and what is not appropriate. What about investment assets which have been accumulated and which attract the maximum 40% IHT exposure on death.

Generally speaking under the current law, taking into account the 'pre-owned asset' income tax charge and the so-called 'reservation of benefit IHT rules', there is little opportunity during a client's lifetime to place all or part of his interest in the family home tax efficiently in a Trust. Therefore, today's talk will not extend to the issues arising out of the ownership private residences in Trusts – other than to suggest that it is unlikely to be an attractive possibility.

Today I am going to talk about what one might call 'straightforward trusts' (Oxymoron?). I am going to assume that those present are not experience in putting forward to clients the idea that they should form a family trust for IHT planning purposes. I am assuming that we have a broad understanding about IHT no one in the audience regards himself as an IHT specialist in the area. I am not a solicitor and so, insofar as I raise trust law issues you are hearing taxman's perspective, i.e. as seen through the eyes of a taxation practitioner.

Before moving on, it is worth making sure that all present have an understanding of the basics as regards trust in England and Wales. The tax rules apply throughout Great Britain and N. Ireland but trust law in Scotland and N. Ireland is in many ways similar but not always the same. Legal advice is always required when considering the creation of a family trust but this is especially so where the law of Scotland or N. Ireland has relevance.

Certain interest in possession trusts are regarded favoured under the new taxation of trust regime, viz the following types:

• A 'disabled person's trust'
• 'Immediate post death interest settlements' created by Will or intestacy.

The pre 22 March 2006 rules effectively continue to operate here. Such trusts are outside the scope of today's talk and reference today to Trusts should be construed accordingly. Specialist legal advice will be required.