Nicholas Acomb explains how the Finance Act 2006 has fundamentally changed the inheritance tax status of trusts
The original inheritance tax status of trusts lies in the Finance Act 1975, which replaced estate duty with capital transfer tax.
It was amended by the Inheritance Tax Act 1984 (ITA 1984), which essentially replaced capital transfer tax with inheritance tax (IHT), and was further amended by the Finance Act 1986, largely affecting lifetime gifts rather than gifts by wills.
For the last 20–30 years lawyers have become familiar with the four main types of trust which typically arise in wills:
- accumulation and maintenance (A&M) trusts;
- trusts with an interest in possession (life interest trusts);
- trusts without an interest in possession (discretionary trusts); and
- bare trusts (not really a trust at all and treated as an outright gift).
The main purpose of the Finance Act 2006 (FA 2006) is to treat all trusts as falling within the IHT regime that previously only existed for discretionary trusts—so that they incur 10-year anniversary charges and exit charges—subject to a number of important exceptions in relation to trusts arising in wills.
The
