IHT clampdown on will trusts to hit middle class

Hundreds of thousands of people will need to review their wills and insurance policies following announcements in the government's Finance Bill on Friday, say tax and legal experts.

The Chancellor is clamping down on inheritance tax (IHT) avoidance by targeting assets held in commonly used trusts, and insurers and tax experts have been waiting for the Finance Bill for clarification on the new rules.

The government claims that only a few wealthy people will be affected by the new rules, which apply to Accumulation and Maintenance Trusts and Interest in Possession Trusts. New trusts will be subject to a 20 per cent IHT charge on lifetime transfers that exceed the IHT threshold (£285,000), plus a charge of 6 per cent every 10 years and an exit charge of another 6 per cent on the value of the trust assets over the IHT threshold.

But far from affecting just the very wealthy, say experts, hundreds of thousands of middle income families may lose out. Of particular controversy is the impact the tax rules will have on parents who want to leave their assets to their children in their wills. To do this, assets are often written into an Accumulation and Maintenance Trust; in order to avoid inheritance tax, assets had to be passed to children by the age of 25. Now they will have to be passed to children at age 18.

'We expect at least 75 per cent of our clients with wills to have to review them,' said Wynne Thomas, senior partner at solicitor Dawsons. 'Those thinking about how to pass on their assets to their children are now going to have to seriously consider giving them gifts outright and avoiding trusts altogether.'

The Finance Bill clarified that straightforward life insurance policies written into trust, such as those taken out to pay off a mortgage if the holder dies, will not be hit by IHT as feared.