Chapter: 2 - Inheritance Tax Mitigation: The Basics

Impact of Finance Act 2006

2.3.4

For the rich (however one defines that term), it is clear that the FA 2006 ‘Inheritance Tax Alignment of Trusts’ has had a significantly damaging effect.  This is because one of the great advantages of making a trust for one’s children or grandchildren – and of course the spouse/civil partner can safely be a trustee, while being excluded from benefit – is that the capital is not available to creditors nor indeed will it generally be vulnerable in matrimonial proceedings.  But now, making any lifetime trust with an initial chargeable value – or any addition to a trust - which causes the settlor to exceed his nil-rate band triggers to that extent an IHT liability at 20% (to rise to 40% if he dies within seven years).  The only exceptions to this rule are an exclusively charitable trust (exempt) or a qualifying trust for a disabled person (a PET).  See also 3.4 and 3.5.