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Last Updated: Wednesday, 22 March 2006, 21:05 GMT
Inheritance tax rules tightened
A man and his calculator
The move encourages assets to be left to children at an earlier age
The government has increased the inheritance tax burden for people who leave money to their children.

It has been common for parents to write wills so that money inherited by their young children is held in trust until they are 25.

Trustees look after the money for the children's benefit once inheritance tax (IHT) has been paid.

The new rules mean that these trusts must now pay out at 18, or pay even more tax.

If they persist with a later payout date then by April 2008 new rules will apply.

18 or 25?

Where a trust is created on the death of a parent, for instance as a result of a clause in their will, IHT already kicks in at 40% and will continue to do so.

If the payout age is 18 then nothing else will change.

There are very, very few trusts which can now be created that will not give rise to any inheritance tax charge
David Rothenberg, chartered accountant

But if the parents decide that the children cannot be trusted with a large sum of money while they are still a teenager, then more taxes will be applied.

Every ten years the value of the money in the trust, over the IHT threshold, will be taxed at 6%.

And there will be an exit charge if money is taken out of the trust in between the ten-year anniversaries.

New trusts created for the benefit of disabled people will be able to avoid this.

Fiona Graham, a tax planning expert at Boodle Hatfield, said the move seemed to encourage parents to let children have assets left to them when they reached 18, rather than 25, when they would generally be considered more responsible.

Lifetime trusts

Lifetime trusts are those created by people when they are still alive, and contain money put aside for the benefit of, say, grandchildren.

Here, IHT is avoided, at least at the standard 40% rate.

But now, when new lifetime trusts are created, a new 20% tax will be levied immediately on the amount over the IHT threshold regardless of the payout age.

Then as time passes by, the periodic 6% charge and the exit charges will also be enforced.

Again, the only exception will be trusts for the benefit of disabled people.

David Rothenberg, senior tax partner at chartered accountants Blick Rothenberg, said.

"There are very, very few trusts which can now be created that will not give rise to any inheritance tax charge."


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