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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Special trusts: treatment of existing A&M trusts after 6 April 08

Revised requirements

Special trust treatment under S71 can still apply to a pre 22 March 06 settlement as long as the conditions continue to be satisfied & it is not a trust for a bereaved minor (TBM).  However, from 6 April 08 the age will be 18 and the beneficiary must take absolutely.  Trustees have until 6 April 08 to alter the trusts accordingly [if they have the power].  (FA06/SCH20/para3)

Alternatively, the trustees could convert the trust to a TBM, or an 18-to-25 trust before 6 April 08. The relevant quarters start from the date of conversion.

Implications for trusts not modified

If the trustees do nothing before 6 April 08, the consequences depend on the beneficiaries’ rights under the trust. 

1) If a beneficial interest in possession already existed at 22 March 06, that property can be either a TBM from this date, or a continuing IHTA84/S49 beneficial interest in possession.

2) If the trust is not a TBM and the beneficiaries are entitled to take the trust property absolutely at 18, then the A&M trust continues to qualify under IHTA84/S71.

  • There will be no ten-year charge and no charge to tax when the beneficiaries take the trust property absolutely at 18.  (IHTA84/S71 (4))

3) If the beneficiary attains a beneficial interest in possession between 22 March 2006 and 6 April 2008, the trust can become an age 18-to-25 trust as long as the trust provisions fall within the default definition below, or are amended to comply with rules for an age 18-to-25 trust. 

If the beneficiaries are entitled to an absolute interest at an age no later than the 25th birthday, and all are entitled to all the income of their portion (or no-one else is) then the trust is now an 18-to-25 trust from 6 April 08. 

  • There is no flat rate charge on this conversion. (FA06/SCH20 /para2 (5))
  • There will be a charge when the beneficiary attains the specified age, which is based upon the amount of time since their 18th birthday. (IHTA84/S71E)

[Property to which a beneficiary is already entitled to a beneficial interest in possession at 22 March 06 cannot be converted into an age 18-to-25 trust. (S71D(5)(c)(i))]

4) In all other instances, the trust joins the normal discretionary/relevant property trust regime as from 06 April 2008 (assuming that S71 continued to apply throughout the period before then). 

  • There is no inheritance tax charge on the property becoming relevant property on 6 April 08. (FA06/SCH20 /Para 2(5))
  • The trust is however then subject to the usual ten year anniversary and proportionate charges on relevant property.

Trusts now relevant property:  Principal charge (ten year anniversary)

  • The ten year anniversary is calculated using the original start date of the trust.  (IHTM42221)
  • PCT, related settlements and non-relevant property cumulate as usual.
  • The property in the trust is treated as relevant property from 6 April 08.  Relief against the ten year charge is available for the period before this date when the assets were not relevant property.  (IHTM42088)

Trusts now relevant property: Proportionate charge on dispositions after 6 April 08 but before the next ten year anniversary

The rate will be calculated under S68 or S69.  Any PCT, related settlements or non-relevant property cumulate for rate as usual.

There will be a reduction to the rate to account for the period before 6 April 08 that the property was not relevant property.  (IHTM42116

a) disposition before the first TYA

The rate is based on the value of all the property which became comprised in the settlement before the disposition (including both relevant and non-relevant property) and property in any related settlement at commencement.  (S68(5)) 

b) disposition after the first TYA

Where a ten year anniversary of the trust would have occurred before 6 April 08, there was no relevant property at that date, and the cumulative historic value of non-relevant property may be very low.  There may not therefore have been an effective tax rate on that event to look back to.  It may seem that there is accordingly no rate of tax on the disposal.

However, the property becoming relevant property on 6 April 08 is treated as an addition under IHTA84/S69 (2)(b).  So in effect, the rate will be based on the value of the trust at 6 April 08.  (Though the IHT threshold at the date of disposal applies.)