Harry would like to make a will, leaving a significant sum of money to his son Ben, currently a minor aged under 18. He is concerned about what would happen if Ben were to inherit at a young age.
He would prefer Ben to inherit when he is 25 years old but has heard this may mean a greater amount of inheritance tax (IHT) is payable than if he allowed him to become entitled to the money at 18.
He wants the trust he chooses to produce as little IHT liability as possible while still fulfilling his wishes.
He wants to know what the implications would be of providing in his will for Ben to inherit at the age of 25 and what other options are available to him.
Harry will have to consider the relevant property regime (RPR), which provides for IHT charges throughout the lifetime of a trust, on its creation, when it comes to an end and at 10-year intervals.
Before the Finance Act 2006 (FA06), the only trusts affected by the RPR were discretionary ones. The FA06 means a number of existing trusts that were not previously subject to the RPR now will be. This includes, for example, most new lifetime trusts and many will trusts created on death, whether specifically or by operation of the law.
If capital is paid out of the trust within the 10-year period, the capital payment would attract an IHT charge at a proportion of the trust rate determined at inception.
The position is more complicated for trusts that only became subject to the RPR after the new rules under the FA06 came into effect on 6 April 2008. The 10-year periods will still be taken from the date of the creation of the trust but the RPR would only apply from 6 April 2008.
The 18 to 25 trust option
An 18 to 25 trust created by the FA06 would allow Harry to select an age between 18 and 25 when Ben can inherit.
Such a trust can either be created on the death of the parent of the beneficiary (it may still qualify even if the parent died before the rules took effect on 22 March 2006) or before 22 March 2006 by any settlor. In the latter, the settlor need not have been the minor’s parent and need not have created the trust on death.
The government has rejected calls to exclude 18 to 25 trusts from the FA06 RPR because IHT receipts would probably be lost. Other trusts will not be excluded either, including accumulation and maintenance trusts and interest in possession trusts.
No IHT would be charged if Ben were to die before he reached 18. If he were to become entitled, as a result of Harry dying, at or under the age of 18 then the trust becomes a bereaved minor trust. Otherwise, trustees could make an advance of assets for Ben under 18, although the assets become relevant property, unless they qualify for a different status at that time.
In all other cases, when assets leave the trust there would be an exit charge. Eighteen to 25 trusts rules are similar to those for bereaved minor trusts for beneficiaries aged under 18 and similar to those for relevant property trusts for beneficiaries over 18.
The exit charge is similar to that in a relevant property trust. However, the charge would be for only seven years, commencing when Ben reaches 18 or if later, when the trust became an 18 to 25 trust. The maximum charge is 4.2%, for a seven-year period, which is proportionately reduced accordingly.
Instead, Harry could consider the bereaved minor trust, which would become available to Ben on reaching 18 or younger. This would not be subject to an IHT charge when Ben became entitled to the capital, died before becoming entitled or if trust assets were advanced.