Topic of the month

Interest in possession trusts

Up until March 2006, it was a fundamental principle of inheritance tax, that the beneficiary of settled property, who was entitled to an interest in possession, was to be treated as beneficially entitled to the settled property itself. This would have been the case, whether the settlement was created by will (or under the statutory intestacy rules) or by lifetime gift. Since 26 March 2006, there are only very limited circumstances in which a settlement can be made by lifetime gift, with a beneficiary being treated for IHT purposes as beneficially entitled to the property comprised in the settlement. However, where the settlement is created by will, or under the intestacy rules, any interest in possession will almost certainly be an ‘immediate post-death interest’ (IPDI) within s49A IHT Act 1984 so that the life tenant will be deemed to own the underlying trust assets. This has the useful effect of securing the IHT exemption for transfers between spouses and civil partners, if the life tenant is a surviving spouse or civil partner, and perhaps the benefit of an enhanced nil rate band on the death of the survivor. Nevertheless the overall consequence, of the property in the settlement becoming taxable as part of the survivor’s estate on the second death, may be disadvantageous notwithstanding the availability of an enhanced nil rate band, if for example business or agricultural property reliefs that would have been available to the original testator are not available on the second death.