Flexible Power of Appointment Trusts Laws 2006 and 2008

A Power of Appointment trust sometimes known as a Flexible Trust is a trust, usually used for life insurance plans, whereby the beneficiaries are defined as a class e.g., ‘the Smith Family’, ‘My Blood Relatives’, ‘the England World Cup Football Squad’ etc., and then interest in possession beneficiaries are specifically named e.g., my daughter Joanne, my son James or in the terms of the England squad, the specific line-up for the football match e.g., No.1 Goalkeeper ‘David the Cat Smith’ and No.2 Right Back ‘John Crusher Jones’. 

The clue of ‘power of appointment’ or ‘flexible’ trust meaning that you can still change the line up for the coming match or the interest in possession’ beneficiaries, your children Joanne and James, to your brother’s children: my niece Janet and my nephew Paul i.e., they were in the general definition of the squad and have now been named a replacement ‘interest in possession’ beneficiaries or players in the team.

Power of Appointment/Flexible Trusts Before 2006

• Can enhance the benefits and make additions to the trust.
• Named beneficiaries entitled to an ‘interest in possession’ on death i.e., death benefit values passed to the named beneficiaries (at the time) inheritance tax free.
• Any gifts to the trust (including premiums) were treated as Potentially Exempt Transfers (PET) i.e., free from inheritance tax after 7 years.

Budget 2006

Chancellor at the time, Gordon Brown changed the tax and qualifying rules on trusts in the Budget 2006.  Prior to this, premiums and additions made to the flexible trust were treated as potentially exempt transfers i.e., after 7 years, the gifts to the trust were free of inheritance tax as was the life insurance policy value proceeds.

21/03/2006

After this date, to keep the trust within old trust rules, no additional money gifts or changes creating additional premiums were allowed.  If any changes or additions were made then the flexible trust would lose its pre 2006 status and chargeable lifetime transfers may create an immediate inheritance tax liability i.e., inheritance tax is actually a gift tax (gifts in life or death) and not just a death tax (this is when many people have to pay it as gifts are usually made on death).

06/04/2008

Any additional money gifts or changes to policies in trust creating additional premiums would alter the classification of the trust to the taxation position of a Discretionary Trust e.g., cumulative gifts over the inheritance tax threshold were Chargeable Lifetime Transfers (CLT) and subject to immediate inheritance tax of 20% in addition to the now reclassified Discretionary Trust with a 10 year periodic charge to inheritance tax of 6% of the value of assets in excess of the inheritance tax nil rate band.

06/10/2008

After this date, any change to the named beneficiaries (team line up) and changed to other members in ‘the squad’ would result in a change in interest in possession and the transfer of value to a new beneficiary would become Relevant Property for Inheritance Tax and become a Chargeable Lifetime Transfer (CLT) i.e., if cumulative gifts/transfers in value exceed the inheritance tax nil rate band.

Summary

Trusts are a valuable but complex area of financial and tax planning and the rules from 2006 and 2008 essentially ‘killed off’ power of appointment/flexible trusts with most advisers now using Absolute or Bare Trusts, where changes cannot be made to keep them within favourable inheritance tax rules.  You need to take advice from us when dealing with trusts.

New Court Ruling 2022: Flexible Trust 2022

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