CG36542 - 2006 IHT changes: IHT treatment from 22 March 2006: qualifying interests in possession
There are certain situations (see IHTM16061) where for IHT purposes trusts are subject to the old treatment for interests in possession [“qualifying IIPs”]. IHTA84/S49 (1A) provides that the old IIP rules only apply where the interest in possession has existed since before 22 March 2006 or the IIP is an immediate post death interest (IPDI), a transitional serial interest (TSI) or a Disabled Deemed or Actual IIP, with the following effects:
- When the holder of the actual or deemed IIP dies, the underlying property is included in the transfer that the holder is deemed to make on death, with for example the spouse/civil partner exemption applying when the asset passes to the spouse or civil partner. Treatment as a qualifying IIP can apply after this only if it is a TSI or a trust for a disabled person as described in CG36543. The latter is extremely unlikely as the person must have qualified as a disabled person when the assets were transferred to the settlement. Where the spouse or civil partner gets a TSI the spouse exemption applies on the death of the holder referred to.
- During the lifetime of the person with the IIP, transfers out of trust of assets to individuals or to trusts for the disabled, other than those within S.89A IHTA are Potentially Exempt Transfers if the individual or disabled person is neither the person with the IIP or his spouse or civil partner.
- There is no ten-yearly charge.
- The death uplift for CGT (see CG36525) applies to actual IIPs falling in any of these classes, but not to deemed ones.
The first type are trusts with an ‘immediate post-death interest’. The main conditions in IHTA84/S49A are that the settlement is effected by will or intestacy (this includes settlements effected as a result of a S.142 IHTA variation or S.144 IHTA appointment) and the beneficiary became entitled to the interest in possession on the death of an absolute owner or under the retrospective effect S.142 or S.144.
The second type are cases where the existing IIP came into existence before 22 March 2006.
The third type are cases with a ‘transitional serial interest.’ There are three kinds. Only in the third case can one TSI succeed another.
Transitional period to 6 April 2008
Under IHTA84/S49C, where a person ‘B’ has an interest in possession which commenced between 22 March 2006 and 5 April 2008 inclusive on the termination of a prior IIP, the settlement commenced before 22 March 2006 and on 21 March 2006 either B or someone else had an interest in possession.
Surviving spouse or civil partner settlements
Under IHTA84/S49D, where a person ‘E’ has an interest in possession which commenced after 6 April 2008, the settlement commenced before 22 March 2006 and on 21 March 2006 someone else ‘F’ had an interest in possession. The previous interest in possession must have ended on F’s death and F was immediately before his death the spouse or civil partner of E.
Example 1:
H has been life tenant of a trust since 2005. He dies in 2010 and his wife W then takes an interest in possession – her interest will be a transitional serial interest and since her estate is increased spouse exemption is available. The death uplift is also available on H’s death and W’s death but the property will be taxable on W’s death. The spouse relief will not be available if the spouse takes on an inter vivos termination of H’s interest in possession.
Example 2:
H has a transitional serial interest that he took in 2007 when the trusts were reorganised. In 2020 he dies leaving his wife an interest in possession. The interest she takes is not qualifying and is not a transitional serial interest because it does not arise on the termination of a pre-22 March 2006 interest in possession. No spouse relief is available. There is a death uplift on the death of H for capital gains tax purposes and inheritance tax is payable. If the assets pass outright to her then spouse exemption is available.
Life Insurance Trusts Under IHTA/S49E,
Where the settlement commenced before 22 March 2006, and immediately before that date, a person had an interest in possession in the settlement, “the earlier interest”, and the settled property consisted of, or included, a contract of life insurance and that interest came to an end on the death on or after 6 April 2008 of the person who had the IIP (or a succession of interests have come to an end, all on the death of the person concerned and the first death occurred on or after 6 April 2008). If the person or another person became beneficially entitled to their interest at this time, “the present interest” (and the rights under the contract were comprised in the settlement throughout the period beginning with 22 March 2006 to the date that person became entitled to their interest) a transitional serial interest will arise.
For trusts for the disabled see CG36543.
Finally there are cases where there is a deemed interest in possession, which for IHT purposes are treated as IPDIs, pre220306 IIPS or TSIs.