Inheritance Tax on Settlements

As many of you who have family trusts will know, there are significant changes to the Inheritance Tax rules for Accumulation and Maintenance and Life Interest Settlements came into effect on 6 April 2008. Broadly speaking, the new regime brought the Inheritance Tax rules for all settlements in line with those previously only in force for Discretionary Settlements, once the beneficiaries reach the age of 18, although there are special rules for trusts for the disabled.

Whilst the changes to the rules are far too complex to go into in any great detail here, those with family settlements should ensure that they have checked with the solicitor who initially set up the settlement to ascertain if and when any Inheritance Tax Charge might arise. For those trusts with assets valued at considerably below the current Inheritance Tax threshold of £325,000 there will be very little, if any, effect.

Although there are significant changes to Inheritance Tax for trusts, the new regime does not affect the Income Tax position of trusts. This will mean that income from Discretionary Settlements and Accumulation and Maintenance Settlements will still be taxed at 40%, whereas the income on Life Interest Settlements will still be taxed at the lower rates. The Capital Gains Tax rate for settlements, however, is 18%. The Income Tax rate for Discretionary Settlements and Accumulation and Maintenance Settlements will increase to 50% from 6 April 2010.