Malcolm Finney outlines the Inheritance Tax rules for Relevant Property Trusts and Qualifying Interest in Possession trusts, in his book 'Personal Tax Planning: Principles and Practice'.
Inheritance tax (IHT) applies not only to individuals but also to property held on trust. It applies when property is settled on trust and when property leaves a trust. IHT may also be levied every ten years during the life of the trust depending upon the type of trust.
FA 2006 made significant changes to the IHT treatment of trusts. The changes brought in by FA 2006 apply not only to trusts set up on or after 22 March 2006 but also to trusts set up before this date albeit subject to transitional provisions.
Relevant Property Trusts
The major impact of FA 2006 is to treat most lifetime trusts created on or after 22 March 2006 as ‘Relevant Property Trusts’. A Relevant Property Trust is one in which no ‘qualifying interest in possession’ subsists (IHTA 1984 ss 58 and 59); classically, a discretionary trust.
A ‘qualifying interest in possession’ is an interest in possession to which an individual becomes entitled pre-22 March 2006.
A ‘qualifying interest in possession’ is an interest in possession to which an individual becomes entitled on or after 22 March 2006 if it is:
- an Immediate Post-Death Interest (IPDI) (IHTA 1984 s 49A);
- a Transitional Serial Interest (TSI) (IHTA 1984 s 49C); or
- a disabled person’s interest (IHTA 1984 s 89B).
(IHTA 1984 s 58)
Any other interest in possession is a non-qualifying interest.
An interest in possession is an interest in trust property by virtue of which the individual has an immediate entitlement to the income from the trust property in which the interest subsists (HMRC Press Release 12 February 1976; SP10/79 and Pearson v IRC (1981).
The qualifying interest in possession may arise in lifetime or on death. However, post-FA 2006 lifetime creation of such an interest is not possible unless the trust qualifies as a disabled trust (IHTA 1984 s 89).
The basic thrust of the changes introduced by FA 2006 is to charge trusts created in lifetime on or after 22 March 2006 to IHT in the same manner as applies to Relevant Property Trusts pre- (and indeed post-) 22 March 2006 (i.e., to bring within the ambit of the Relevant Property Trust charges newly created lifetime interest in possession trusts).
Relevant Property Trusts are subject to a charge to IHT on trust property every ten years and when trust property leaves the trust. In addition, property settled on such trusts constitutes Chargeable Lifetime Transfers (CLTs) thus precipitating an IHT charge at the date of settling the property; the charge is levied at 20% (subject to the availability of the Nil Rate Band (NRB)).
Qualifying Interest in Possession Trusts
Qualifying interest in possession trusts, on the other hand, are not subject to the ten-yearly charge nor any charge when property leaves the trust. Property settled on such trusts constitute Potentially Exempt Transfers (PETs) (not CLTs).
However, on the death of an individual possessing a qualifying interest in possession, the trust assets in which the interest subsists are treated as part of the deceased’s estate (i.e., IHT is levied thereon; IHTA 1984 s 49). The death of a beneficiary under a Relevant Property Trust has, by comparison, no such impact for IHT purposes.
Post-FA 2006, it is therefore possible for an interest in possession to be either a qualifying or non-qualifying interest.