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

Qualifying interest in possession

Qualifying interest in possessionThis guidance note covers what an interest in possession is and what it means to have an interest in possession. The note also considers when trusts are qualifying or non-qualifying in detail. The IHT consequences of having an interest in possession are covered in the Qualifying interest in possession trusts ― IHT treatment guidance note.Significance 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 their estate 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) where the assets are taxed in the estate of the life tenant on death, and•relevant property (non-qualifying interests in possession and discretionary trusts) which are subject to the relevant property IHT regimePrior to 22 March 2006, all interest in possession trusts fell into the first category, but changes introduced by FA 2006 transferred most newly created 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 for details of the prior treatment.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 an interest in possession in settled property shall be

Appointments from trusts within two years

Appointments from trusts within two yearsThis guidance note explains the inheritance tax consequences of making an appointment from a Will set up in a trust within two years of the death. It also considers the capital gains tax consequences which are not the same as those of a deed of variation and care should be taken not to trigger an inadvertent capital gains tax liability.Relief for appointments from Will trustsIf a Will creates a relevant property 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 trusts for bereaved minors (see the Trusts for bereaved minors guidance note) and 18-25 trusts (see the Age 18-25 trusts guidance note). The key issue is that this reading back only applies as long as an interest in possession has not yet arisen.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

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