Successive life interests

A solution to the IHT/CGT dilemma?

Discretionary Settlements are a fairly recent innovation, in the development of trust law. In traditional settlements, beneficiaries were granted life interests. Such an arrangement would, no doubt, protect the settled property from creditors and others claiming against the life tenant personally. But once the fiscal authorities had devised the legal fiction (now enshrined in Section 49 (1) of the IHT Act 1984) of regarding the life tenant as the beneficial owner of the underlying trust assets for the purposes of Estate Duty, its successor Capital Transfer Tax and, now, Inheritance Tax it must have seemed that there was little advantage in holding property within an interest in possession settlement. If the life tenant is going to be taxed as if he owns the trust assets, why bother with having the trouble and bother of trusts? Why not just make the statutory fiction come true, and let the intended beneficiary own the property outright? Claims by disgruntled creditors, ex-spouses and others may provide a reason why not, especially in the light of the Court of Appeal decision in Lambert v Lambert noted in “From the Courts” on p.3 . Apart from this, however, life interest trusts may have a role to play in modern tax planning, securing an orderly succession of the family property.