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Treasury amendments announced in June to the Finance Bill currently before Parliament may have now averted the need for many wills to be redrafted as originally feared following surprise announcements in the Budget in March. The inheritance tax (IHT) exemption for surviving spouses or civil partners will now be allowed where a will provides for a life interest for them. Such arrangements are often used by people who have remarried and wish to provide their present partner with an income or a right to live in property. but want the capital to pass to the children of their first marriage. They can also protect your children's inheritance in case your surviving partner remarries after your death.

 

Another change will allow trustees of accumulation and maintenance (A&M) trusts to retain control of the trust assets until beneficiaries are 25, although there will still be a tax charge of up to 4.2% of the value of the assets when they leave the trust if the beneficiary is over 18. The original proposals in the Finance Bill would have brought all A&M trusts into the discretionary trusts regime, with tax charges of up to 6% every ten years, unless the trust provided for capital to pass absolutely to the beneficiary at age 18. Many parents and others felt that this was far too young for most children to come into what might be a great deal of money.

Existing A&M trusts will remain free of inheritance tax up to 5 April 2008. After that date they will come under the new A&M trusts rules, provided the beneficiary will take the trust assets absolutely by the age of 25. Despite the age relaxation, the terms of the trust should still be reviewed over the coming months to make sure that they will not inadvertently fail to qualify for the new rules and become subject to the full discretionary trusts regime.

The maximum 4.2% will only be charged where the assets stay in the trust until the beneficiary is 25. Where property leaves the trust when the beneficiary is over 18 but under 25, the charge will be 0.15% for every full three-month period by which the beneficiary is over 18. The nil-rate band, currently £285,000, will be available, after deducting any chargeable transfers that the settlor made in the seven years before setting up the trust. In most cases, therefore, if the value of trust property is not more than £285,000, there will be no inheritance tax to pay.

 

New trusts set up by grandparents after 21 March 2006 will be treated as discretionary trusts. New trusts will only escape ten year charges if they come into being under the will of a deceased parent, as well as satisfying the requirement for the beneficiary to take the property absolutely by age 25.