October 2007

The next move

For financial advisers involved in trustee investment work, particularly those working with law firms, accumulation and maintenance (A&M) trusts were formerly a popular type of trust. However, since the Budget 2006 A&M trusts are now becoming a historic footnote as changes to inheritance tax (IHT) have made them unattractive for future use with the change from PET to CLT status.

For A&M trusts set up before 22 March 2006 we are already well into the two-year transitional period which lasts until 5 April 2008. This transitional period started with Budget Day in 2006 and is open to all pre-22 March 2006 A&M Trusts. It can be seen as a government concession of sorts, allowing the trustees of historic trusts some time to take action prior to new rules for those trusts coming into force on 6 April 2008. As a result of the lobbying which took place between the publication of the Finance Bill in April 2006 and the Standing Committee stage of the parliamentary process, the options open to trustees were expanded. With only a handful of months now remaining before the transition period ends, it is a good moment to consider the options on the table.

New rules

A&M trusts were particularly targeted by Budget 2006. The argument about Budget 2006 creating "retrospective taxation" can be applied here, since these trusts were created by clients when one set of tax rules applied, whereas a quite different set of tax rules are now to be imposed from 6 April 2008. If these trusts are not changed in a certain way prior to 5 April 2008, then the new regime will apply to them from 6 April 2008 onwards. The "new regime" effectively means the regime for discretionary trusts involving ten-year anniversary charges and an exit charge when capital is distributed to a beneficiary. Both these charges can be nil depending on the value of the trust fund, or a maximum of 6%.

The main choices for the trustees are to:

- change the age at which the beneficiaries receive capital to age 18 (to escape the new regime and its IHT charges at ten-year anniversaries and exit payments);

- change the age at which the beneficiaries receive capital to age 25 (a halfway house concession created during parliamentary revision of the Finance Bill in 2006). This would create a maximum IHT exit charge of 4.2%, which is arrived at by taking 70% of the normal maximum charge of 6%;

- do nothing, since the value of the trust means that no IHT is due anyway;

- do nothing and pay the IHT in due course. This option will be attractive to trustees of high value trusts where the main consideration is asset protection and where it would be unacceptable to advance large sums to beneficiaries at young ages. Some A&M Trusts have capital vesting ages of 30, 40 or beyond which the trustees will want to preserve;

- consider whether it is appropriate (or indeed possible) to wind up the trust and distribute the assets now.

A change of strategy

A possible barrier for A&M trusts could be the trust wording. The issue could be that there is no flexibility to change the capital vesting age and there is certainly no guarantee a trust will contain this power. Going to court to have the trust deed formally altered by judicial variation is perhaps an option for some, but an expensive option and not one likely to be adopted by many trustees.

For financial advisers giving investment advice here, the investment strategy of the trustees might need to change. The length of the investment period in some trusts might shorten should the capital vesting age move to 18 or 25 from an older age. This could prompt changes in the investment decisions of the trustees. If the trust itself is wound up and distributed to the beneficiaries, those beneficiaries might require financial advice in respect of how to deal with the new funds received.

There is plenty to think about in the months ahead for pre-22 March 2006 A&M trusts. The clock is ticking and legal advice should be taken to ensure the opportunities are explored and the pitfalls avoided. The role of the financial adviser here is to be alert to any investment issues arising as a result of any change to the trust.

Julie Hutchison
Estate Planning Specialist
Standard Life