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‘Trusts for Bereaved Minors’ (‘TBM’) and ‘Age 18 to 25’ Trusts are ‘Discretionary’ trusts that are exempt from tax but are restrictive in application and the ability to be created.

TBM are usually established by a parent under their own will for their own children, but can also be created under the rules of intestacy, a valid Deed of Variation to a will or under the Criminal Injuries Compensation Scheme. IHT remains chargeable on the parent’s death using the usual IHT rules (assuming that the estate exceeds the IHT chargeable limit), but none is payable by the trust provided that when the child reaches the age of 18 they become absolutely entitled to all of the capital held within the trust (plus any accumulations of income). Trustees are permitted to transfer the property into a ‘Discretionary’ trust allowing a life interest rather than giving the property to the beneficiary absolutely at 18. No IHT is charged on the transfer, but as a new trust has been created the special provisions no longer apply and it will be subject to the ten-year ‘anniversary’ and ‘exit’ charges as usual.

‘Age 18 to 25’ trusts are a ‘bolt on’ to the ‘TBM’ provisions such that if, for example, instead of inheriting at age 18, the trust provides for the age of inheritance to be 25, then no IHT ten year ‘anniversary charges’ will be levied whilst the beneficiary is under the age of 18 and no ‘exit’ charge will apply where an absolute interest is taken. Should there be an advancement of assets or the beneficiary die between the ages of 18 and 25, there will be a reduced IHT charge (using the same method of calculation as the ‘exit’ charge), but in this case based on the period that has elapsed since the beneficiary’s eighteenth birthday, and asset values when the trust was originally set up.

Example:
If parents wish their children to inherit at age 25 rather than 18 then the ‘Age 18 to 25’ trust will be faced with a ten year ‘anniversary’ charge after the child reaches 18.

The ten-year ‘anniversary’ charge on a Discretionary trust is 6%.  Therefore with an ‘Age 18 to 25’ trust, the rate of IHT will be at 4.20% on the excess over the Nil Rate Band, being the charge payable for a period of seven years.

Many parents may decide that a 4.20% tax charge is a price worth paying to safeguard the underlying assets whilst the child matures.