Property cannot be tied up in a trust indefinitely and future interests in property must take effect within the “perpetuity period”. There are also restrictions on the length of time that income can be accumulated as part of capital within a trust.
Currently, the perpetuity period may be:
- A fixed period of up to 80 years; or
- The common law period, which is the lifetime of certain individuals living when the trust is created (lives in being) plus 21 years.
The rule applies to interests under trusts, and also to other interests in property (e.g. future easements, restrictive covenants, options and pre-emptive rights).
The Accumulation Period is restricted to one of six specific periods, of which the most commonly used is 21 years from the creation of the trust.
2010 Changes
The Perpetuities and Accumulations Act 2009 (“2009 Act”), which will come into force on 6 April 2010, introduces changes which bring the UK into line with some offshore jurisdictions, thus promoting its place as a trust jurisdiction. The new rules will apply only to trust interests – not to property interests, and can be summarised as follows:
- All new non-charitable trusts will have a 125 year perpetuity period. The Settlor can, if he wishes, specify a shorter period by which time the various interests must vest.
- All existing trusts keep their established perpetuity period. The 2009 Act will in some cases allow trustees of an existing trust with a common law perpetuity period to make an irrevocable deed replacing the common law period with a 100 year fixed period. This will not, however, affect the accumulation period of such trusts.
- For non-charitable trusts established after the Act comes into force, the statutory provisions restricting accumulations will be abolished and the trustees will be able to accumulate income for the whole of the trust period. The Settlor can still restrict this period if he wishes. There remain restrictions to the accumulation period for charitable trusts.
- However, new trusts set up under wills which were made before the Act comes into force will remain under the old rules. This is so regardless of when the testator dies.
Until the new Act comes into force, wills and the creation of trusts should not be put on hold where these are immediately required. From 6 April 2010, trusts can be varied and wills can be ‘republished’, to bring them within the new rules.
For further advice please contact Chris Maddock, Head of Private Client Tax, or Mary Hase, Director of Private Client Tax Services. Alternatively, please complete and submit the online form below.