Payment of IHT on termination of an IIP

[anon123]

I have a trust that has terminated on the death of the life tenant (it is a qualifying pre 2006 IIP). I understand that the trustees are liable to the IHT directly relating to the value of the trust and this will be met out of the trust capital. They will need to sell some quoted shares in order to pay the IHT and I am not sure of the implications of this.

I know that for CGT purposes when an IIP comes to an end and another person becomes absolutely entitled the trustees are deemed to have sold and immediately reacquired the trust assets at market value but no chargeable gain arises. The trustees then hold the assets as bare trustee for the beneficiary. Does the beneficiary become absolutely entitled to the trust capital net of the IHT payable by the trustees or the full value?

If the trustees now hold the entire fund as bare trustee then presumably for CGT purposes the sale of the shares (in order to raise funds to pay the IHT) would be a disposal by the beneficiary rather than the trustees. The beneficiary has shares in the same company so if the matching rules apply the existing personal holding would dilute the base cost and there would be a capital gain.

Is this correct, or is absolute entitlement net of the inheritance tax payable by the trustees out of the fund?

[maths]

As you correctly point out, on the death of the life tenant if an individual becomes absolutely entitled thereto the trustees are deemed to have disposed of and reacquired the assets in which the interest subsisted at market value; however, no CGT charge arises on the trustees.

The fact the trustees have an IHT liability in respect of the termination of the qualifying interest in possession does not alter the above but they may resort to the selling of trust assets in order to discharge their IHT liability; any such sales would be as bare trustee and hence any CGT liability that of the beneficiary.

The trustees could presumably transfer the shares (ie legal title) out to the beneficiary (ie without selling) subject to some charge or agreement that they will be put in funds by the beneficiary to enable their IHT charge to be discharged.

[lesley58]

Does the same apply when a life tenant vacates a property, ie the IIP Trust no longer exists as such and the property is held in bare trust by the Trustees giving the remaindermen more control over the disposal of said property?

If that were the case and the Trustees were solicitors and also executors would their role as executor take presidence and thus effectively deny the beneficiaries /remaindermen any input?