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Last Updated: Thursday, 6 April 2006, 14:29 GMT 15:29 UK
Treasury under pressure on trusts
Charlie & Lola
Children may inherit less money if the trust changes go through
The Treasury has come under pressure to drop plans announced in the Budget to change the taxation of trusts.

An alliance of professional bodies such as the Law Societies and the institutes of Chartered Accountants has called for the changes to be postponed.

Under the proposals, lifetime gifts made under trust - or trusts created for children when parents die - may have to pay more inheritance tax.

The finance bill enacting the budget will be published on Friday.

Representatives of the various professional bodies, including the Society of Trust & Estate Practitioners (STEP) and the Chartered Institute of Taxation, lobbied senior civil servants at the Treasury on Wednesday.

A spokesman for the lawyers and accountants said it was likely that at least one change to the government's plans would be included.

He said that trusts that are automatically set up for children when their parents die intestate - without having made a will - would probably be excluded from the proposed new inheritance tax regime.

John Riches, from STEP, said: "If you die without making a will and you have children, the statutory rules on intestacy can mean that a trust is automatically set up for your family.

"This means if someone dies leaving a house in their own name worth 500,000, their family may now have an extra tax bill of 36,000 compared with nil before Budget day."

Wealthy individuals

The Treasury defended its position, saying that only a small minority of wealthy individuals will be affected by its changes - and that the change would only raise 15m a year.

It estimates that only 20,000 existing trusts will be hit and they will need to contain assets worth more than the current inheritance tax threshold of 285,000.

But STEP reckons there are at least a million wills in existence that may have to be re-written to conform with the new rules.

Meanwhile, the insurance company Skandia has estimated that in addition to these trusts there are 4.5 million insurance policies in existence which may have to be altered.

More inheritance tax

Under the likely new legislation, trusts set up by wills to ring-fence inherited money for young children when their parents die will have to pay out at 18 to avoid further inheritance tax charges.

Typically, these trusts currently pay out when children reach 21 or 25.

The extra charges will be levied on these trusts once every ten years, and again when they pay out.

Other trusts, typically set up by a parent or grandparent who then expects to live for at least seven years, will only be able to avoid inheritance tax if the child due to eventually receive the money is disabled.

As well as the interim and exit charges, these trusts will now face an immediate 20% tax charge when they are set up, levied on their value over the inheritance tax threshold.

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