The UK Chancellor of the Exchequer’s new rules on the taxation of trusts have been given Royal Assent this week in the Finance Act. So what ...

The UK Chancellor of the Exchequer’s new rules on the taxation of trusts have been given Royal Assent this week in the Finance Act. So what are the options available for individuals who wish to pass on their wealth to their children in a responsible and tax efficient manner? First, families with more complex affairs are likely to be able to take better advantage of the Inheritance tax exemptions available, whereas families with less complicated affairs are more likely to choose a successive approach to passing on their wealth, for example, using a nil rate band trust every seven years. In general, it is likely that succession planning will have to be started sooner than before and, if people have to start giving away their assets earlier in life, there could be a further increase in the popularity of pensions in order to fund a retirement with no remaining capital. It is also likely that potentially exempt transfers will become more popular for those who would rather pass assets to their children early than take a tax hit as long as they survive seven years. Some people may attempt to get round the rules and "give" assets such as stocks and shares to their children without telling them, on the basis that the children become the legal owners but don’t get their hands on the assets. This does not work and although difficult to police, it is likely that HM Revenue & Customs will actively seek this out, especially in view of the current climate of cracking down on tax avoiders. Ultimately, those with substantial wealth may avoid trusts altogether and explore holding their wealth in alternative structures such as corporate entities. However, others will simply take the tax hit and continue to use trusts to protect their family assets as past generations of their family have done for years. Here are eight tax planning options available following this year’s Finance Act: 1 Use successive nil rate band trusts every seven years. Gifts, including gifts to a trust, that are below the prevailing nil rate band for IHT (currently £285,000) can escape IHT, although you can only make such gifts once every seven years. Creating a new discretionary trust every seven years with such an amount could allow a traditional trust route for succession planning but without the new tax charges. However, the ability to do this will be rare, and it will rely on you being able to begin the process much earlier in life than you might have previously started considering to whom you wish to leave your wealth. 2 Put AIM shares into a trust. Some AIM and other shares qualify for business property relief if held for more than two years and are therefore exempt from IHT. The new charges on trusts will therefore not apply if they are put in a trust. But bear in mind that AIM shares are notoriously volatile. You might also need to buy and sell shares at certain times for tax planning purposes which might not be at a favourable time for the market. Unless you wish to hold such shares for the lifetime of the trust, then in order to prevent a 6 per cent tax charge arising every ten years, shares will have to be bought and then sold after two years or so have passed, and then repeated seven or so years later. This is a lot of hassle and unlikely to bring strong returns. 3 Use a private company or family business. If you are a business owner who has already given away business assets to your children, you might now consider buying them back. This hands over a proportion of your wealth to your children whilst you retain business assets in your estate which should qualify for Business Property Relief and prevent inheritance tax on death. 4 Use agricultural assets. Agricultural land/assets can qualify for Agricultural Property Relief and therefore will not attract an IHT charge. An ex-farmer who gave away his farm some time ago to his successor but retained his other non-agricultural assets might now use those assets to buy the farm business back again. The farmer will have successfully passed on his wealth to his successor and when he dies the farm will not attract IHT due to APR (if all requirements are met for the relief). 5 Use corporate ownership of family assets. A corporate structure can be established in order to hold and transfer your family’s wealth to different generations through share ownership. This could restrict the control passing down the generations (in a similar but different way to a trust). The usual IHT rules may apply, but assets can be passed to younger generations with a mitigated risk of the younger family members using their wealth irresponsibly. 6 Give the assets outright. Avoid the trust route altogether - in some situations, the tax you save will more than outweigh the risks of handing over wealth to teenagers. 7 Take the tax hit. Trusts are still an effective structure in which you can hand over wealth to your children whilst preventing the children gaining control immediately. On an ongoing basis, you effectively only need to forego 0.6 per cent per year investment performance on your assets (or perhaps even improve it by this amount), in order to eliminate the cost of the tax. 8 Take the tax hit but just to age 25 (using an A & M trust). A specific concession given in the end by the UK Government has been to allow accumulation & maintenance trusts to operate until the beneficiaries are aged 25, but the cost of this is a one-off tax charge of 4.2 per cent of the value of the assets. This rate of tax might well be considered a price worth paying to avoid the risk of irresponsible behaviour by teenagers.