The many families with a life interest trust have only two weeks to reorganise their affairs or face a 20 per cent tax hit, warns UK private client specialist law firm Boodle Hatfield.

The change and charge follow legal changes in 2006, which, though described as a realignment of trust taxation rules, have in fact significantly curtailed the ability to create new trusts without an upfront tax charge.

From 6 October 2008, existing life interest trusts will be subject to a 20 per cent inheritance tax charge above the nil rate band of £312,000 (about $575,000) if the income beneficiary is changed. Families are therefore being urged to make any alterations ahead of the deadline.

Hayden Bailey, a tax planning expert and solicitor at the firm, said: “It has not been possible to create a life interest trust since 22 March 2006 without facing a potential 20 per cent upfront charge to inheritance tax. 

“The government offered a window of opportunity for trustees of existing trusts to change the beneficiary of such a trust without incurring the charge.  This is the last chance to reorganise existing trusts.

“As long as this change is made before 6 October and the original beneficiary survives for a further seven years the entire trust fund will have any inheritance tax liability deferred until the deaths of the new beneficiaries, which if grandchildren will hopefully be many years away.  The tax hit will have been avoided altogether on the death of the original beneficiary.

“If the trustees tried to take the trust income away from the original beneficiary and pay it to, for example, the grandchildren after 6 October, they could have to pay not only an immediate charge of 20 per cent on the value of the entire trust fund, but they would also have to pay a six per cent tax charge on every tenth anniversary of the trust and also a proportionate charge whenever assets came out of trust.”