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View the related Tax Guidance about IPDI (Immediate post-death interest)

Qualifying interest in possession

Qualifying interest in possessionSignificance of a qualifying interest in possessionWhere a beneficiary’s entitlement to trust property satisfies the definition of a qualifying interest in possession (QIIP), the trust property falls into the beneficial entitlement regime for inheritance tax purposes. See the Taxation of trusts ― introduction guidance note.The inheritance tax treatment of trusts falls into two broad categories:•beneficial entitlement (bare trusts and qualifying interests in possession), and•relevant property (non-qualifying interests in possession and discretionary trusts)Prior to 22 March 2006, all interest in possession trusts were included in the beneficial entitlement category, but changes introduced by FA 2006 transferred most lifetime interest in possession trusts into the relevant property category. Hence the beneficial entitlement treatment only applies to qualifying interests in possession. See the March 2006 changes to trust taxation guidance note.IHT consequences of beneficial entitlementThe term beneficial entitlement refers to the inheritance tax treatment under IHTA 1984, s 49, which provides that a person beneficially entitled to a (qualifying) interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsides. This means, in effect, that the trust property is taxed as if it belonged outright to the beneficiary. All other trust property is subject to the special inheritance tax rules of the relevant property regime. See the Definition of relevant property guidance note and other notes in that sub-topic. In summary, the consequences of the beneficial entitlement category are:•the full value

Appointments from trusts within two years

Appointments from trusts within two yearsRelief for appointments from Will trustsIf a Will creates a relevant property trust (typically a discretionary trust) and within two years of death there is a distribution (or other event) which would otherwise have given rise to an exit charge because the property ceases to be relevant property, then:•there is no exit charge, and•the inheritance tax legislation has effect as if the Will provided for the distributionIHTA 1984, s 144Whilst most relevant property trusts are discretionary trusts, the rules can also apply to other forms of relevant property trust such as TBMs and 18–25 trusts. The key point is that an interest in possession cannot yet have arisen ― see below.The relief gives a testator the opportunity to postpone decisions about how the estate is to be distributed by leaving it on a discretionary trust. The executors / trustees can decide on the most appropriate distribution after the testator has died, without incurring exit charges because the assets have passed through a relevant property trust.A discretionary Will trust may be used to maximise reliefs and exemptions on death, depending on the circumstances arising at the time. Typical tax saving measures include:•appointing the whole estate to the spouse or civil partner, and allowing them to distribute the estate by means of potentially exempt transfers•appointing assets to the value of the unused nil rate band in favour of children with the remainder going to the spouse or civil partner. Appointments can include

Why people use trusts

Why people use trustsThis guidance note explains the key reasons why people use trusts during their lifetime and on death.Trusts are mainly used to pass assets and wealth down through the generations. Trusts have been used for many years to protect assets, control their management and to control how, when and if the assets are transferred to beneficiaries. Tax is also an important factor and trusts can be used as part of IHT planning.For an explanation of the parties to a trust and the terms used when talking about trusts, see the What is a trust? guidance note. The Creating a trust guidance note sets out further details of how a trust is established.ControlOften the settlor of a lifetime trust will appoint themselves as a trustee and thus enables them to retain control over the assets. Alternatively, they may appoint a friend or relative or a professional in lifetime or in their Will alongside a letter of wishes detailing how they would like the assets dealt with.Using a trust allows the settlor to postpone gifting the assets directly to any specific beneficiary enabling the settlor to retain effective control over the ultimate destination of the assets and the timing of any outright gift. The trustees can appoint the assets to a suitable beneficiary when they see fit.The ability to retain control can be particularly helpful in the context of family businesses. The use of a trust can allow the founder shareholders to transfer their shares to a trust as