Do I still need to check my will?

The Chancellor, Gordon Brown has bowed to pressure and amended key elements of his crackdown on certain trusts, which he had announced in his March budget. The amendments said life policies written into trust before budget day on 22 March 2006 would not be caught.

However, the Association of British Insurers (ABI) warned that new life policies could still face a 6 per cent tax on proceeds above the inheritance tax (IHT) threshold of £285,000 this tax year, when the policyholder died.
Even policies taken out before budget day could be caught if they are changed — if a family has another child and adds him or her to the policy, for example.
The Society of Trust and Estate Practitioners warned that families would still need to review their wills despite the u-turn, adding that the climbdown did not extend to trusts set up on divorce.

We consider the new rules in question.

Q: Will I still need to review my will?
A: Yes, if the will sets up an “accumulation and maintenance” (A&M) trust on your death. These trusts are often set up by parents or grandparents who want assets to pass to their children when they die, but who want the trustees to retain control of the money for a certain period.

Until the budget, the trustees could retain control of the income until the beneficiary reached the age of 25, and control of the capital for 80 years from the creation of the trust. After the budget, however, these trusts would have had to pass assets absolutely to the beneficiary at 18 or face a tax charge of 6 per cent every 10 years on the value of assets above the IHT threshold. These rules would have applied from 2008.

Following the amendments, however, the tax will apply only once the child reaches 18, not from the creation of the trust.

If your will sets up an A&M trust, you must therefore decide whether you are happy for the assets to pass to the child absolutely at 18, or if you want the trust to wait until 25 and pay tax of 4.2 per cent on any amount in excess of £285,000.

Q: Were any other will trusts affected?
A: Yes, a type known as an “interest in possession” trust.
People often set up this type of trust in their will if they want to provide their spouse with an income, but make sure their capital passes to their children.
Following the budget, assets above £285,000 could have been subject to a 40 per cent IHT charge when they passed into trust for the spouse.
However, the chancellor has completely backed down on this aspect of the trust changes.

Q: What if I have already set up a trust?
A&M trusts set up in your lifetime will benefit from the same concession as those set up on death. So they will face a tax charge only when the beneficiary reaches 18 — but this is still more onerous than before the budget, when no tax would have been due.

Q: How will life policies be affected?
If you set up a life policy and put it in trust before budget day, you should be exempt from the new rules — unless you change the terms.
Advice should be taken when setting up a new policy.

If you require any further information, please email or contact us.