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<b>Budget 2006: </b> Inheritance tax thresholds rise. By John Newth

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22nd Mar 2006
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The chancellor has announced increases in the inheritance tax exemption limit.

The exemption limit will rise by stages from £275,000 in 2005/2006 to £325,000 in 2009/2010.

The new exemption limits and the percentage increases from the previous year are as follows:

2006/2007 £285,000 - 3.63%
2007/2008 £300,000 - 5.26%
2008/2009 £312,000 - 4.00%
2009/2010 £325,000 - 4.16%

These increases are, of course, very welcome, but their true impact depends on whether house prices increase or decrease in the next few years. If house prices increase by the same or higher percentages than those listed above, then there is no real benefit to taxpayers. If house prices remain static or even decrease in value, then there is real benefit. We shall have to wait and see what happens, but at present the percentage increases each year seem to be between two or three per cent over the general inflation rate.

Restriction on trusts
Currently accumulation and maintenance trusts and interest in possession trusts receive special treatment for IHT purposes. Lifetime transfers into these types of trust are exempt if the settlor survives for seven years.

A new measure tightens up the qualification for such treatment, effective from 22 March 2006 for new trusts, and subject to transitional provisions for existing trusts. Basically, the special rules will now only apply to trusts that:

  • are created on death by a parent for a minor child who will be fully entitled to the assets in the trust at age 18; or
  • are created on death for the benefit of one life tenant in order of time whose interest cannot be replaced (more than one such trust may be created on death as long as the trust capital vests absolutely when the interest comes to an end); or
  • are created either in the settlor's lifetime or on death for a disabled person, within the terms of section 89(4), IHTA 1984.
  • Interest in possession and accumulation and maintenance trusts that do not qualify will come within the mainstream IHT rules for 'relevant property trusts'. The effect of the legislation in these circumstances means that:

  • there is an immediate 'entry' tax charge of 20% on lifetime transfers that exceed the IHT threshold into 'relevant property' trusts;
  • a 'periodic' tax charge of 6% on the value of trust assets over the IHT threshold is imposed once every ten years;
  • an 'exit' charge proportionate to the periodic charge when funds are taken out is imposed between the ten-year anniversaries.
  • Inheritance tax and pensions
    The new pension scheme rules come into place on 6 April 2006, and a measure to be included in legislation confirms an existing concessionary practice for pension scheme members who die under the age of 75.

    The concessionary practice was first published in HMRC Tax Bulletin 2 in February 1992 and was updated in 1999 to take into account the introduction of income withdrawal under a pension scheme.

    An IHT charge can, under section 3(3), IHTA 1984, arise if a pension scheme member exercises their right not to take benefits at pension age. However IHT is not applied, currently by concession, where enhanced death benefits are paid and the beneficiary is a spouse, civil partner or a person who is financially dependant on the scheme member.

    IHT is also not applied where a pension scheme member chooses not to exercise a right at a time when they are in good health and that choice is not subsequently varied, even when a reduction in life expectancy would normally trigger an IHT charge.

    The concessionary treatment will be legislated in the Finance Bill.

    Alternatively Secured Pensions
    Alternatively Secured Pensions (ASPs) were a method designed for those who have principled religious objections to annuities, and related to the death of a pension scheme member on or after age 75. However HMRC states that some individuals and advisers have been using the ASP provisions generally to enable individuals to pass on their tax-privileged retirement savings to their dependants, rather than to provide a pension on retirement. Anti-avoidance legislation will be included in the Finance Bill with the effect of imposing IHT where there has been an abuse of the rules.

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    By AnonymousUser
    23rd Mar 2006 12:25

    budget - am descretionary trusts
    say, 100,000 pounds from existing am descretionary trust which has been paying its periodic charge for last 30 years is payed to beneficiary absolutely towards purchase of house.

    last 10 year periodic charge payed 5 years ago.

    what will be tax on the 100,000 on distribution?

    will trust or beneficiary be paying the new tax?

    trust has assets well in excess of that amount.

    hope mr.brown hasleft his budget to have this question easily explained!

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