The Chancellor has announced an extension to the transitional period for the new inheritance tax rules for trusts. This period was due to come to an end on 5 April, but will now be extended to 5 October 2008.
The reason for this has been a disagreement between HMRC and the tax profession as to how the transitional rules worked in one particular situation. This is where a trust exists where an individual is entitled to the income from that trust – known as an interest in possession trust. If that trust were to be modified, but the individual still retains a right to the income, it was uncertain as to whether this fell within the transitional rules or whether a new trust was created and an inheritance tax charge crystallised.
HMRC have confirmed that modifying an interest in possession trust, but keeping the existing income beneficiary the same, will not give rise to an inheritance tax charge providing it takes place within the extended transitional period. However, the same change being made after 5 October will create an immediate inheritance tax charge.
Trustees of such interest in possessions now have a further opportunity to review the position and make such modifications as they see fit. Trustees may also wish to use the extended transitional period to modify the trust to pass the income right on to other beneficiaries. The Budget gives further scope to consider such changes.
