Section 144 IHT Act 1984 – A seasonal gift from the Chancellor

Readers are doubtless familiar with the ‘timing trap’ in making distributions out of a discretionary Will trust. If the distribution is to be written back into the Will by s144 IHT act 1984, then of course it must be made within the two years following the death. However, it must not be made until at least three months have elapsed following the death. This was made clear by the High Court decision in Frankland v IRC (1996) STC 735. This is because s144 (1) IHT Act 1984 requires that the type of distribution which can be treated as written back into the Will must be one which would have been subject to an IHT charge, as an exit charge pursuant to the rules contained in Chapter III of the IHT Act 1984. These are the provisions which set out the somewhat elaborate regime for calculating and charging tax when property ceases to be subject to discretionary trusts, and on every tenth anniversary. A distribution which would have been exempt from such a charge because it becomes subject to employee or charitable trusts, or becomes comprised in a heritage maintenance fund will, nevertheless, count. However, where the most important exemption, that for transfers to a spouse, is concerned, there is a nasty little trap. Property leaving a discretionary settlement, within the three months after it is made is not subject to the IHT exit charge. This is confirmed by s65 (4) of the IHT Act 1984, but the peculiar consequence is that s144 could apply to such a distribution.