Jonathan Tod, Barrister, 29 Bedford Row and Jan Ellis, Tax Partner, Baker Tilly. New tax provisions hidden away in Sch 20 to the Finance Act 2006 abolish accumulation and maintenance trusts and mean that inheritance tax (IHT) is now payable in respect of any trust set up during the settlor's lifetime. The new regime also extends to trusts set up to provide a home for a child or children during their minority in Children Act 1989, Sch 1 proceedings. The Re P approach is no longer tax free.
The provisions are retroactive and will affect trusts set up before Budget Day 2006, which were structured as accumulation and maintenance settlements, and all new settlements executed after 22 March 2006. There are various different tax charges that can apply to trusts within the new regime. In this article the authors examine the tax charges, and the exemptions from them, in detail, identifying the requirements that must be complied with in order to avoid them. The new regime is illustrated with a worked example and ways of providing a home for children under Sch 1 without creating trusts are considered, and the tax implications of these explored. Concluding with some useful advice points for practitioners the authors warn that the potential liability to IHT charges for trusts imposed under Sch 1 proceedings must be managed unless and until Parliament is persuaded to amend the legislation.