A&M trusts will disappear in April 2008. This may seem a long way away, but lawyers need to start reviewing their clients' investment options now, says Steven Heller
It's 2007. We've had nearly a year to digest the 2006 Budget changes to trust taxation, and the deadline for making changes to affected trusts looms. Like Cinderella's chariot, accumulation & maintenance (A&M) trusts will cease to be the vehicle they once were, and failure to act now could, come 6 April 2008, leave your client's funds sitting in a pumpkin (a heavily taxed one).
Now is the time to give your trusts a good, hard look to determine which ones to wind down, which ones to modify, and which ones to leave as is (some people like pumpkins).
Dates to remember
There are two key dates to remember for Finance Act (FA) 2006 compliance. The first is 22 March 2006, Budget Day. That is the date from which all new trusts must comply with the new rules '“ and this includes all new additions to existing trusts.
The second date to remember is 6 April 2008. This is the date by which all FA2006 changes take effect on trusts already in existence on 22 March 2006. Where transitional relief is available, it is also the date by which changes must be made to those existing trusts in order to receive the relief.
There is one other date that may be important, depending on the trust, and that is the date on which the particular circumstances of the trust create a new settlement or an exit which effectively creates a new relevant property trust.
The end of A&M trusts
HMRC's message is clear: 'From 22 March 2006, no new accumulation and maintenance trust can be created.' Of the three big changes to trust taxation, this has to be the most fundamental. As every article on the subject seems to recall, it was the 1974 Labour government that created the tax favoured scheme for accumulation and maintenance trusts, but it is the New Labour government of today that has taken it away (they promised 'a new trust on tax' but what we've got is a new tax on trusts).
The end of IHT-favoured status effectively means two things:
- no new A&M trusts can be created; and
- trusts that attempt to accomplish the same goals as an A&M will be treated as relevant property (and will not be subject to the accumulation and maintenance trust provisions of s 79 of the Inheritance Tax Act (IHTA) 1984).
That leaves the pre-FA 2006 A&M trusts. Pre-existing A&M trusts are allowed to continue under the old rules until they wind down, as long as the terms provide for (or are changed to provide for) absolute entitlement at age 18. An alternative to vesting at 18 is to change the terms of the trust (if necessary) to a 71D (18-25 trust). Trusts that are not changed will be treated as discretionary trusts from 6 April 2008.
One of the potentially more irksome aspects of the FA 2006 changes is the immediate application of relevant property charges to all new settlements '“ including those created by additions to an existing fund. In other words, A&M trusts into which the settlor has been contributing capital on a periodic basis must necessarily be composed of pre-and post-FA2006 settlements, with the latter being subject to relevant property charges.
Interest in possession trusts: window of opportunity
Interest in possession (IIP) trusts are also effectively eliminated by FA 2006, except for those IIPs that were in existence on 22 March 2006. Additionally, FA 2006 provides for transitional serial interests (TSIs), which are IIPs arising before 6 April 2008 from a pre-22 March 2006 IIP that is terminated. In effect, this presents an opportunity to change beneficiaries on an existing IIP trust to a younger generation to maximise the IHT benefit (of course, on creation it would be a new potentially exempt transfer (PET), subject to the seven-year rule).
Trust review and next steps
The significance of the FA 2006 changes demand review of potentially affected trusts (and trustees should be actively seeking such review). Any review should first seek to identify those trusts requiring urgent action, and then to look at all trusts potentially affected by FA 2006 and identify options, both prospectively and for current trusts.
Trusts that present an urgent need for ameliorative action can be identified by of the age of beneficiaries, the prospect of additions to the trust, or in the case of wills, whether we are within the two-year frame for making a deed of variation.
The one thing the FA 2006 does is present an opportunity to creatively explore what options are available.
The immediate consideration has to be to identify what options are left for existing A&M trusts. There are not many immediately identifiable, but some consideration should be given to amending existing trusts to provide for vesting at 18 or taking advantage of the 71D trust (albeit with its exit fee). Will trusts offer the additional option of providing for an immidiate post death interest (IPDI), which would defer IHT until the death of the beneficiary as part of his/her estate.
As for longer term planning, clients should be advised to take full advantage of the nil rate band, creating new settlements within the NRB every seven years (married couples could stagger trusts between the two of them at three to four year intervals). Indeed, we could usurp the title of 'trust-busters', with the aim of breaking up larger trusts into smaller, single-beneficiary NRB trusts.
Inform, reassure, advise
The way I see it, the goal of client contact on these changes can be summed up with three letters, IRA. I don't want to suggest that FA 2006 has done to trusts what the IRA did to Northern Ireland, but the letters capture the three-tiered approach to client contact on this matter: inform, reassure, advise.
Inform the client about the changes, reassure the client that their solicitors are on the case, and advise the client on what the best options are. In the US, an IRA is an individual retirement account, which might be a more appropriate reference, or better, think of Ira Gershwin, the lyricist who wrote 'I Got Plenty O' Nuttin' (which may summarise clients' feelings after assessing the IHT effect on their trusts). Once a trust has been reviewed send the client an IRA letter.Tags: