IHT and Accumulation & Maintenance Trusts: The Finance Act 2006 Changes Explained
Before 22 March 2006, A&M trusts for children and grandchildren were outside the relevant property regime — no 10-year charge, no exit charge. Finance Act 2006 changed this. New A&M trusts from that date are fully subject to the relevant property regime. Existing trusts that did not convert by 6 April 2008 are also now chargeable. Understanding where your family trust sits in this framework is essential.
A&M Trust IHT Timeline: Pre and Post FA 2006
Favourable: outside relevant property regime
A&M trusts satisfying s71 IHTA 1984 were not subject to the 10-year periodic charge or exit charges. Provided the qualifying conditions were met (beneficiary would become entitled to income or capital by age 25, income was accumulated or used for maintenance/education), the trust was treated similarly to a bare trust for IHT charge purposes — no relevant property charges during the accumulation period.
Finance Act 2006 announced — changes effective immediately
Chancellor Gordon Brown's 2006 Budget announced the immediate extension of the relevant property regime to most trusts that had previously enjoyed favoured treatment, including A&M trusts. New trusts created from 22 March 2006 were immediately subject to the relevant property regime. Existing trusts created before that date had a transitional window to restructure.
Existing A&M trusts: convert or become relevant property
Existing A&M trusts (created before 22 March 2006) had until 5 April 2008 to: (1) convert to a trust where beneficiaries become absolutely entitled at age 18 ('age 18' trust) — this continued to be treated outside the relevant property regime; or (2) convert to an 'age 18-to-25' trust under s71D IHTA 1984 — subject to a reduced exit charge if the beneficiary takes capital between 18 and 25 (maximum 4.2% of the fund); or (3) do nothing and become a fully chargeable relevant property trust from 6 April 2008.
Most A&M trusts now relevant property trusts
Trusts that did not convert are now subject to the full relevant property regime: 10-year anniversary charges (up to 6% of the trust fund above the available nil-rate band) and exit charges when capital is distributed to beneficiaries. Many trustees and settlors who were unaware of the deadline may now have trusts with significant accumulated IHT charges. Reviewing the IHT position of any trust established before 2006 for children or grandchildren is strongly advised.
Frequently Asked Questions
What was an accumulation and maintenance trust?
An accumulation and maintenance (A&M) trust was a type of discretionary trust specifically designed under s71 IHTA 1984 for the benefit of children and grandchildren. To qualify, the trust had to meet specific conditions: (1) one or more beneficiaries would, on reaching a specified age (not more than 25), become entitled to the trust income — or alternatively, the trust income was to be accumulated or applied for their maintenance, education, or benefit; (2) no interest in possession existed in the trust (no beneficiary had an immediate right to income); (3) all the trust's potential beneficiaries were grandchildren of a common grandparent, or children, widows, or widowers of such grandchildren who had died before they could become entitled. If these conditions were met, the trust was outside the relevant property regime — no 10-year charge and no exit charge — making it highly tax-efficient for family wealth transfers to the next generation.
What did Finance Act 2006 change about A&M trusts?
Finance Act 2006 (FA 2006) fundamentally reformed the IHT treatment of most trusts other than bare trusts. With effect from 22 March 2006, virtually all new trusts (other than bare trusts and certain qualifying 'immediate post-death interest' trusts) became subject to the relevant property regime — including new A&M trusts. Existing A&M trusts (created before 22 March 2006) retained favoured treatment temporarily, with a window to convert: if by 6 April 2008 the trust was restructured so that beneficiaries became entitled at age 18 (not 25), it could remain outside the relevant property regime. Alternatively, if conversion was made to an 'age 18-to-25' trust (s71D IHTA 1984), beneficiaries retained a right to capital up to age 25 but with a reduced exit charge (up to 4.2%). Trusts not converted by 6 April 2008 became fully relevant property trusts.
What is an 'age 18-to-25 trust' under s71D IHTA 1984?
The age 18-to-25 trust (s71D IHTA 1984) was introduced by FA 2006 as a compromise for settlors who wanted beneficiaries to receive capital between the ages of 18 and 25 — but not immediately at 18. It operates as follows: (1) No 10-year periodic charge applies while all beneficiaries are under 18. (2) An exit charge applies when capital is paid to a beneficiary between the ages of 18 and 25. The maximum rate of this exit charge is 4.2% (calculated as 30% of 6% multiplied by the number of quarter-years after the beneficiary's 18th birthday, up to 28 quarters). (3) Once a beneficiary reaches 25, any remaining trust capital must be paid out or the trust becomes a fully chargeable relevant property trust. The s71D trust is therefore appropriate for parents or grandparents who want to delay capital distribution to a young adult while limiting the IHT cost — but accepting some exit charge between 18 and 25.
Can a new A&M trust be created now (post-2006) with the same IHT advantages?
No — the favourable A&M regime under the original s71 IHTA 1984 is no longer available for new trusts created after 22 March 2006. Any new discretionary trust created for children or grandchildren will be subject to the relevant property regime: (1) the transfer into the trust is a CLT — immediately chargeable at 20% above the nil-rate band; (2) 10-year anniversary charges apply at up to 6% every decade; (3) exit charges apply when capital is distributed. The closest alternatives today are: (a) bare trusts — the transfer in is a PET, no ongoing charges, but the child has an absolute right to the assets at 18; (b) age 18-to-25 trusts under s71D (if structured correctly) — limited exit charge, but only for new trusts that qualify; (c) straightforward outright gifts with the 7-year PET clock.
What should trustees of pre-2006 A&M trusts check?
Trustees of trusts established before 22 March 2006 for children or grandchildren should review: (1) whether the trust converted to an age 18 trust or an age 18-to-25 trust by 5 April 2008 — if not, the trust is now in the relevant property regime and 10-year charges and exit charges apply; (2) the date of the last 10-year anniversary — anniversary charges may have accumulated and gone unpaid, creating HMRC liability; (3) whether HMRC has been notified of chargeable events — failure to account for relevant property charges is a reportable omission and can lead to penalties; (4) the current market value of the trust fund — the 10-year charge is up to 6% of the fund above the available nil-rate band at the anniversary date; (5) whether the trust deed allows the trustees to advance capital to beneficiaries — if the trust is now an unwanted relevant property trust, advancing all capital to beneficiaries (and triggering the exit charge) may be more tax-efficient than continuing to pay 10-year charges.
How does the 10-year charge work for a relevant property trust that was formerly an A&M trust?
Once a former A&M trust became a relevant property trust (either immediately for new trusts post-22 March 2006, or from 6 April 2008 for unconverted existing trusts), the standard relevant property charge mechanism applies. The 10-year periodic charge: on each 10-year anniversary of the trust, HMRC charges up to 6% of the trust fund above the available nil-rate band. The 'available nil-rate band' for a trust that has been in existence is not the full £325,000 — it is reduced by: (a) any CLTs made by the settlor in the 7 years before the trust was created; (b) any related settlements (trusts made on the same day by the same settlor). Exit charges (between anniversary dates): when capital is distributed to a beneficiary between 10-year anniversaries, a proportionate exit charge applies — calculated as a fraction of the anniversary rate based on the number of complete quarters elapsed since the last anniversary. Both charges are reported to HMRC on form IHT100.
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