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Finance Act 2006
In the budget of April 2006 the government decided to change the tax implications of some Trusts. I do not intend to explain the changes to all the Trusts involved as there are many papers available to serve this purpose.
I will explain the changes that have been made to the Trusts that are used in Wills for Inheritance Tax planning and for the benefit of young children.
Inheritance Tax Trust
The good news is that the Trust we use in a Will for the purpose of mitigating Inheritance Tax has not changed.
Accumulation and Maintenance Trust
This Trust we use in a Will when money has been bequeathed to a minor. It is also known as an A & M Trust.
Money is held for a minor until they attain the age of 18, (this being the youngest they can inherit), or 21 or 25. Other ages can be specified.
Before the budget of 2006, any money bequeathed to in an A & M Trust was received tax free. Since the budget of 2006 any money inherited at the age of 18 will be still be received tax free.
However, if the money is inherited at any other age, and 21 is the most common age, an exit charge will be made. In other words, a tax will be levied on the money being taken out of the fund.
This tax liability is calculated at 0.6% per year. For someone inheriting at the age of 21 years there will be an exit charge, (a tax bill to pay) of 1.8% of the money removed from the fund. This is calculated at 0.6% x 3 years = 1.8%.
For someone inheriting at the age of 25 years the tax bill will be 4.2% of the money inherited.
In addition, there is a tax charge on the 10th anniversary of the A & M Trust fund of 6%. If a child was left a sum of money in an A & M Trust at the age of 6 years, there will be a 6% tax bill when the child is 16 years as the fund will then have been in existence for 10 years.
This new law applies to all Trusts that have been written before the budget of 2006 which have not yet become effective.
If, in your Will, you have stated that you wish your children to inherit at an age other than 18 years, they will have to pay the exit charge. This of course is only applicable if your Will is proven, in other words, if you and your partner/spouse have both died and you have left your child/children your estate or money, and you are liable for Inheritance Tax.
Please contact me if you wish to change your Will. There will be a small charge for changing your Will.
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