STEP Welcomes Government Climb-Down On Trust Tax Treatment

by Jason Gorringe, Tax-News.com, London

12 June 2006

Following strong representations from the Society of Trust & Estate Practitioners (STEP) and other professional bodies, the UK government has returned to the pre-Budget position for spouses safeguarded by trusts in wills, it emerged last week.

As a result, spouses will not be in danger of losing their family home, and Muslim families can still make Islamic wills.

However, the new regime creates a series of different choices for families that may make their existing wills unsuitable.

John Riches, Chair of STEP’s Technical Committee, announced that:

“STEP is delighted that the government has listened to us and has returned to the pre-Budget position for spouse exemptions. This change means that people in second marriages will still be able to use trusts in their wills to protect both their spouse and the children of their first marriage without incurring a tax charge. Muslim families will still be able to use trusts to comply with Sharia law.”

Thursday’s changes also go some way towards allaying fears that irresponsibility would be encouraged by making children receive capital from a trust at age 18.

According to STEP, in essence families will have three broad choices, as follows:-

(1) Give children capital at 18 outright with no ongoing 6% regime;

(2) Leave children capital in fully flexible trusts with no certainty as to when they will receive their share: in this case, the trust will enter the 6% regime on the death of the parent and remain subject to that regime until capital is paid to the child outright; or

(3) Leave children the capital on trusts broadly similar to pre-Budget accumulation and maintenance trusts where they must receive their capital by age 25. In this case, the trusts will not become subject to the 6% regime until the child attains age 18; in other words the additional premium to be paid for leaving the capital in trust for 7 years after age 18 is 4.2%.

Mr Riches went on to add:

“The government has acknowledged that parents want the flexibility not to have to leave their children everything outright at age 18. The premium for deferring capital entitlement to age 25 using favoured accumulation and maintenance trusts is now only payable after age 18 and families will be able to choose by age 18 whether to pay the additional tax to secure flexibility or hand the capital over."

“We still need to work through the detail of the changes and not everyone will be satisfied but for anyone planning on using a trust in their will, things are looking a lot better than they did on 22 March.”

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