TRUSTS AND ESTATE PLANNING
by Steve Taylor

Accumulation and maintenance trusts in 2001

Accumulation and maintenance trusts enjoy a special tax status in that during the accumulation period they are discretionary trusts but are not subject to the discretionary trust tax regime.

However, this special status lasts for 25 years only unless:

• all the beneficiaries are grandchildren of a common grandparent (i.e. of the same generation)
• all the beneficiaries are children, widows or widowers of grandchildren who have died before becoming entitled
• (exceptionally) the trust was created before 15 April 1976, the trustees had no power to bring in the common grandparent condition and the trusts have not been varied since 15 April 1976.

If a trust ceases to be an accumulation and maintenance trust because there is no common grandparent and the 25-year period has run out, then there is a charge to tax at 21% unless all the trust property has been distributed or the beneficiaries obtain interests in possession.

The 21% rate is arrived at by taking:

• 0.25% for each of the first forty quarters (10%)
• 0.20% for each of the next forty quarters (8%)
• 0.15% for each of the next twenty quarters (3%)

Thereafter the normal rules for ten-yearly and proportionate charges for discretionary trusts apply to these settlements.

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The accumulation and maintenance regime came into being on 15 April 1976 and the 25-year period could therefore run out from 15 April 2001 onwards.

An accumulation and maintenance settlement is most likely to fall foul of the common grandparent condition if, at the time the settlement was created, it was intended to provide for unborn grandchildren.

For example:

In 1976 Henry was a wealthy individual with two married children. He hoped to become a grandfather and wanted to set some money aside for the education of his future grandchildren. On 1 December 1976 he created an accumulation and maintenance settlement for his niece and his unborn grandchildren at age 25 with no right to income at age 18. Grandchildren were born in 1987 and 1990.

If the 25-year time limit is allowed to run out on 1 December 2001 a tax charge arises. Suppose the value of the trust fund at that date is £250,000. The tax charge is then £52,500. However, if the grandchildren are given interests in possession before 1 December 2001, the tax charge is nil.

It is therefore important to review all accumulation and maintenance trusts as they approach 25 years in being if the common grandparent provision does not apply. These accumulation and maintenance trusts should be terminated by appointing absolute interests or interests in possession to the beneficiaries.

There are capital gains tax implications if the trust holds chargeable assets but this will not, of course, be an issue where the trust fund comprises purely life insurance policies.

 

Every care has been taken to ensure that the information given in this document is correct and in accordance with our understanding of current law and Inland Revenue practice. The law and Inland Revenue practice are subject to change.

1^st June 2001

 

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If you would like any further information or advice on any pension or investment issue please contact
CAMPBELL HARRISON
Pensions and Investment Managers
3 Cloisters Chambers, St Peter's Close, Sheffield S1 2EJ
E-mail: steve@campbellharrison.co.uk
Tel: 0114 272 3994  Fax: 0114 272 3775
Regulated by the Personal Investment Authority

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