Inheritance tax planning after the 2006 Budget
Autumn Taking Account
The changes to the inheritance tax rules for trusts have finally become law, after the government was forced to water down some of its initial proposals. Certain trusts have emerged unscathed, but following the changes many trusts set up after 22 March 2006 – Budget Day – will now be subject to inheritance tax.
Trusts are often created in wills, and where this is the case the new rules mean that now is a particularly good time to review your will. The changes could mean that your arrangements will no longer work as you expected.
Amending a will is often very straightforward, and we can advise you whether and how the changes affect your will and discuss with you alternative arrangements that might negate the new rules.
The tax changes are not the only reason to review your will. Property and other asset values continue to increase far faster than the inheritance tax nil rate band threshold, which is currently just £285,000. The rate of tax on death is a flat 40% above this level.
A recent study predicts that by 2020 one in five homes will be worth more than the nil-rate band threshold if it is just increased in line with retail price inflation. So far, calls for a large increase to the threshold have gone unheeded.
You should also look at any family trusts you may have. Many trusts for grandchildren that are currently exempt from inheritance tax may become liable to both the periodic and the exit inheritance tax charges unless the beneficiaries become entitled to the trust assets at the age of 18. The charge will generally apply from 6 April 2008, and you have until then to amend the terms of the trust to avoid the charges.
Some trusts may enter the tax regime earlier than the 2008 deadline, for example where another grandchild is born. So you should review the terms of these trusts sooner rather than later.
Despite some highly publicised calls for its abolition, inheritance tax is probably here to stay. It would certainly be imprudent to bet on its future disappearance, especially when it is still possible to save tax with some straightforward and highly effective planning.