A basic understanding of wills and trusts can help an executor to consider the options available and questions to ask when looking after the wealth of the family.
Settlements in trusts are taxable for IHT purposes as if they are trusts without an interest in possession, 'the relevant property regime' (excluding settlor interested trusts). However, there are three exceptions:
an ‘immediate post death interest’ - trusts created on death for the benefit of one life tenant
a ‘disabled person’s interest’ - trusts created either in the settlor's lifetime or on death for a disabled person as defined in s89 of IHTA
a ‘trust for bereaved minor' - trusts created on death by a parent for a minor child who will be fully entitled to the assets in the trust at age 18.
Since 22 March 2006, the main disadvantage of making a relevant property trust has been that the settlor incurs an immediate IHT charge (unless it falls in one of the above categories), if the value of the settlement exceeds their cumulative nil rate band, whereas prior to 22 March 2006 the settlor would make a potentially exempt transfer (PET) on making an Interest in possession or Accumulation and maintenance trust.
What is immediate post death interest?
Immediate post-death interest was defined under The Finance Act 2006. It is aninterest in possession trust where an individual has the interest in possession of settled property and:
the settlement must be affected by a will or under intestacy
the life tenant must have become beneficially entitled to the interest in possession on the death of the testator or Intestate
the settled property does not fall within S71A (trusts for bereaved minors) and has never done so since the individual became beneficially entitled to the interest in possession
the interest is not a disabled person’s interest (IHTM42805) and has never been so since the individual became beneficially entitled to it.
What is a trust for disabled persons?
Section 89 of the IHTA 1984 applies to settled property transferred into a settlement after 9 March 1981 and held on trusts for:
the property can be applied for the benefit of the disabled person, and
either the disabled person is entitled to all the income arising from the property or, if the disabled person is not entitled to all of it, none of the income can be applied for the benefit of anyone else.
For the purposes of the regime for trusts with vulnerable beneficiaries a disabled person is either:
a person unable to administer his or her property or manage his or her affairs because of mental disorder within the meaning of the Mental Health Act 1983, or
a person in receipt of any of the following:
disability living allowance, by virtue of entitlement to the care component at the highest or middle rate, or the mobility component at the highest rate
personal independence payment
an increased disablement pension (under s104 SSCBA 1992 or s104 SSCBS(NI)A 1992)
constant attendance allowance
armed forces independence payment.
What is a trust for bereaved minors?
In order for a trust to be treated as a trust for bereaved minors, the following conditions must be satisfied:
at least one of the minor’s parents must have died
the trust was created by the parent’s will, on intestacy, or under the Criminal Injuries Compensation Scheme
the trust must meet the conditions set out in section 71A Inheritance Tax Act 1984:
the minor becomes absolutely entitled to the trust property on or before they turn 18;
whilst the minor is under 18, if any capital is applied to a beneficiary, it is applied to the benefit of the bereaved minor; and
while the minor is living and under 18, the minor is either entitled to all income generated by the trust or if income is applied, it is applied only for the benefit of the bereaved minor.
Potential tax implications
Assets held in an Immediate post death interest do not count as ‘relevant property’ and, as such, are not subject to any tax regime, such as
the assets are transferred out of the trust (this is known as an exit charge); or
when the ten-year anniversary of the trust occurs.
Immediate post death interests and trust for disabled persons mean that the beneficiary owns the underlying trust assets for IHT purposes. If a bereaved minors' trust is created, then IHT may be payable on the parent's estate, but if the age contingency is 18, there is no further charge to IHT. There could be a possibility of IHT charge if the age contingency is 18-25 and the contingency is satisfied.
Practitioners interested in basic IHT planning should watch our free webinar that comes with a technical factsheet.