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Exclusion zone

Proposed amendments to the Finance Bill could widen the number of cases benefiting from the IPDI exclusion

Last week, I looked at the Government-tabled amendments to the bereaved minors’ trust rules and introduced the extension to the immediate post-death interest exclusion from mainstream charges to inheritance tax.

Under the original Finance (No 2) Bill 2006 provisions, the IPDI exclusion from the discretionary trust rules was limited to cases where the deceased testator (or intestate) left property on trust for the benefit of an individual which satisfied the six conditions set out in the new section 49A IHTA 1984. This stated:

  • “Condition 1 is that the settlement was effected by will or under the law relating to intestacy.

  • Condition 2 is that L became beneficially entitled to the interest in possession on the death of the testator or intestate.

  • Condition 3 is that if the interest can be brought to an end by the exercise of a power (whether a power to bring the interest to an end in its entirety, to bring it to an end so far as relating to part only of the property in which it subsists or to bring it to an end in either of those ways), section 49B applies in relation to the power.

  • Condition 4 is that on the interest’s coming to an end (whether in its entirety or so far as relating to part only of the property in which is subsists):

    (a) A person (whether or not L) will become absolutely entitled to the property in which the interest ceases to subsist or(b) Section 71A will apply to that property or(c) Section 89 will apply to that property, or(d) That property will be held on trust for charitable purposes only.

  • Condition 5 is that:

    (a) section 71A does not apply to the property in which the interest subsists and(b) The interest is not a disabled person’s interest.

  • Condition 6 is that conditions 3 to 5 have been satisfied at all times since L became beneficially entitled to the interest in possession.”

    The amendment in question removes conditions 3 and 4. This means that interest in possession trusts created on death can be a lot less rigid than originally required if they are to be outside the discretionary trust regime.

    Of great importance is the fact that on the death of a person with an interest in possession, the succeeding beneficiary does not have to become entitled to an absolute interest.

    This gives much greater flexibility with regard to testamentary dispositions on death.

    Most of the early examples given of IPDIs refer to trusts for the primary benefit of a surviving spouse. Many IPDIs will, no doubt, have a surviving spouse as the immediate beneficiary with an interest in possession. It remains the case that if a gift is made to a surviving spouse on death outright or if the surviving spouse is given an interest in possession, the gift will be exempt.

    The spousal life interest trust therefore represented a frequently used way to defer IHT without giving a surviving spouse an outright uncontrolled interest. Now that the IPDI rules look likely to be extended and relaxed, it would not be unreasonable to consider that these trusts will continue to be used.

    However, the surviving spouse is not the only person who could be entitled to an IPDI. The IPDI provisions are not confined to any particular class of individual. The extended IPDI provisions could therefore be of interest to those wishing to implement more flexible trusts than originally permitted.

    This widening may cause some to reconsider an interest-in-possession will trust to use the nil-rate band as opposed to the discretionary will trust. Clearly, tax should not be the only determinant of which trust to use but it is relevant.

    As was the case before the Budget, some may choose the interest-in-possession version (provided it conforms to the new definition) as opposed to the discretionary trust. There will be no need to monitor the value of the trust for the purpose of the 10-yearly and exit charge, for example.

    On the other hand, there will be a need to consider the risk of a potentially-exempt transfer on a change of beneficiary and the possibility of a charge on the death of a beneficiary with an interest in possession.

    If the asset of the trust were a pre-Budget life policy and the trust were established before the Budget, the death of a beneficiary would now appear to be excluded from charge as a transitional serial interest. However, for other than these pre-Budget life policy trusts, the risk exists.

    As for all trust planning
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