Nil rate band legacies, chargeable transfers and life interest trusts

As a result of the substantial amendments made to the new s49A IHT Act 1984, while the Finance Bill was being considered by the Standing Committee of the House of Commons, most will trusts creating interests in possession will very probably be Immediate Post Death Interests (IPDI), with the life tenant being deemed to own the trust assets. This will of course ensure the availability of the spouse exemption where the life tenant is the testator’s spouse or civil partner. However, the downside is that the trust fund will be fully taxable on the death of the life tenant, and the testator’s nil rate band will not have been used. The traditional mechanism for making use of the testator’s nil rate band has of course been a discretionary trust, and this is probably a good starting point. The question is, what steps can be taken to create a non IPDI life interest for the surviving spouse? The advantages of this is that the surviving spouse can enjoy the legal rights of a life tenant (eg to occupy a house held by the trustees), which may lead to income tax and CGT advantages (see the discussion on page four).