Using Trusts to Avoid Inheritance Tax

A number of changes have been introduced in the March 2006 Budget that will effectively cut down on the formation of trusts that hold assets for new generations.

The new rules mean that people using certain trusts (i.e accumulation & maintenance trusts and interst in possession trusts) to avoid inheritance tax will have to pay high charges on the assets.

Trusts have been a staple tool of financial planners for many years, and they have been singled out by the Labour government as sinister tax dodges designed to avoid paying inheritance tax.

Under the new rules, the only way to circumvent the new tax charge is to allow children access to the assets by the age of 18. Most wealthy individuals who already use trusts to hold assets for their children will change the age the children can access the assets from 25 to 18.

Direct gifts for children can still be made free of any IHT charge through a potentially exempt transfer.

Up to now, you could protect your children from the temptation to spend the assets by putting them into a trust and surviving 7 years, thereby side-stepping the 40% tax. However if you do that now, any amount over the threshold will be slapped with a 20% charge immediately PLUS another 6% charge to be levied every 10 years. The government is also considering another 6% charge when cash is withdrawn.

More top tips on legally avoiding this onerous inheritance tax can be found in our Avoid Inheritance Tax Guide.