Months of campaigning by PSW and solicitors’ and accountancy firms across the country has contributed to an announcement on 8 June 2006 that the Chancellor is to go back on his proposal to hit will trusts with a significant charge to tax where children were to inherit above the age of 18 years.

Changes to the Inheritance Tax rules for family trusts were announced in this year’s budget. The Chancellor intended to bring the taxation of all trusts in line with the present regime for discretionary settlements. Subject to the Nil Rate Band allowance (£285,000 for the tax year 2006/07) there would be an entry charge of 20% together with a charge to tax every 10 years and an exit charge when assets leave the trust. The proposal was to be retrospective and to include all trusts set up in wills whenever drafted as well as lifetime trusts already in existence.

Contrary to the Chancellor’s indication that only a few hundred wealthy families would be affected, solicitors and accountants, along with many others, campaigned that as many as 10 million people would need to change their wills. Anyone who had stated in  that their children (or indeed any child) would inherit at an age older than 18 would be hit.

We have been anxiously awaiting the legislation to confirm the Chancellor’s Budget proposals and although we still have to await the final format of the Finance Bill, we are now able to reassure out clients that changes to wills are unlikely to be needed. The indication is that there will be a small charge to tax on legacies being left in trust to children at an age over 18 but this is not indicated to be as penal as the original proposals led us to believe.

We are not entirely out of the woods yet though. Other types of trusts including Accumulation and Maintenance trusts already in existence or set up in the future are still likely to be hit. Most often this type of trust is used by grandparents wishing to gift money during their lifetime to pay for school fees for example. In all likelihood, the tax benefits of this will be very much limited by the proposed changes.

Negotiations continue and there is likely to be considerable further debate before the final details of the Bill will be revealed and we are able to confirm exactly how the changes proposed back in March will come into effect.