Taxing times

Older private client lawyers will remember the pre-2006 inheritance tax (IHT) regime for trusts, under which there were interest in possession trusts, discretionary trusts and accumulation and maintenance trusts. But many are still confused by the complex changes made to the IHT trust rules in 2006.

Here is a quick guide to the current system. To keep things (reasonably) simple it ignores trusts for the disabled (section 89), which are a category all of their own. References are to the Inheritance Tax Act 1984 (as amended). The rules that used to apply to discretionary trusts (ten-year charges, exit charges, etc.) are called the relevant property regime.

Before budget day

The first question is whether the trust was created before or after budget day, 22 March 2006. This is the date of death for will trusts or for trusts arising under a section 142 deed of variation or on intestacy.

The present regime depends on which old regime the trust fell into and whether (and what) there have been any changes to the trust.

The trust will still be in the same IHT regime if, before budget day 2006:

• the trust was in the discretionary (relevant property) regime; or
• the trust was in the interest in possession regime and there have been no changes to the trusts.

But if, before budget day, one of the following cases apply, things get a little more complicated:

• the trust was in the interest in possession regime and there have been changes to the beneficial trusts; or
• the trust was in the accumulation and maintenance regime.

The position must be reviewed carefully. There are no shortcuts here '“ any of the following could apply to the trust:

• It remains in the 'old' interest in possession regime. This is the case only if the interest in possession that was in existence on budget day 2006 remains in place.
• It moves to a transitional serial interest (section 49B). This applies only if there was an interest in possession before budget day 2006 and there is now an interest in possession in place. Either it:

a) succeeded to the original before 6 October 2008 (section 49C); or

b) belongs to the widow or widower of the original beneficiary and arose on that beneficiary's death (section 49D).

• It remains in a tax-free regime equivalent to the old accumulation and maintenance rules (section 71). This applies only if there was an accumulation and maintenance trust before budget day 2006, and, at least since 5 April 2008, the trust has provided that the beneficiary must become entitled to capital by 18.
• It moves into the age 18 to 25 regime (section 71D(3)). This applies only if there was an accumulation and maintenance trust before budget day 2006 and, at least since 5 April 2008, the trust has provided that the beneficiary must become entitled to capital by 25.
• It moves into the relevant property regime.

After budget day

For trusts created or arising on deaths after budget day 2006, the present regime depends on whether the trust was set up by a lifetime gift or on death. If the trust has been created by a lifetime gift it will be within the relevant property regime. If the trust arose on death, there are four possibilities which must be considered in order:

• If the trust arose on the death of a parent, and a child or children of that parent must become entitled to capital by 18, it is a bereaved minors' trust (section 71A).
• If it is not a bereaved minors' trust, and if an interest in possession trust took immediate effect, it is an immediate post-death interest trust (section 49A).
• If the trust is neither a bereaved minors' trust nor an immediate post-death interest trust, and it arose on the death of a parent whose child or children must become entitled to capital by 25, it is an age 18 to 25 trust.
• If it is none of these, it is a relevant property trust.