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While the Chancellor made some headline giveaways on taxation in last week's Budget, he also sneakily hid some big tax charges in the small print. Any family using a trust - a legal agreement to keep cash and other assets at "arm's length" from the people who will one day benefit - are to suffer a huge tax hit.
The most obvious hit is on trusts used to pay for the grandchildren's education. The advantage to such "accumulation and maintenance" trusts was that, assuming grandparents survive seven years after handing over the cash, the money is out of their estate. That meant there was no inheritance tax to pay on the amount in trust (IHT is charged at 40 per cent) after the grandparents' death.
Not any more. All newly-set up trusts will now have to pay 20 per cent tax upfront on all the cash and
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assets inside them that go over the threshold for paying IHT: in 2005/6, £275,000. Plus, there's a six per cent tax every 10 years on the value of the assets over the threshold, and an exit charge when any property leaves the trust, based on the six per cent tax hit.
The new rules also hit "interest in possession" trusts, used to pass wealth to children and grandchildren, without letting the youngsters have full control of the cash until they are well into their twenties.
Existing trusts will be subject to the new rules from 2008. But experts say there's now little or no reason to set up any new trusts.
From now you might as well hand over the lot to children at 18, then keep fingers crossed that you'll live another seven years - and that the youngsters understand that "prudence" is not just someone you swap numbers with at a party. 
FIRST POSTED MARCH 31, 2006
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