IHTM16061 – Interests in possession: Finance Act 2006 and the new trust regime.
Interests in possession & Immediate Post Death
Interests, Disabled Person’s Interests and Transitional
Serial Interests
The Finance Act 2006 made a number of fundamental changes to
the Inheritance Tax treatment of trusts. Where a person becomes
beneficially entitled to an interest in possession (IHTM16061) on
or after 22 March 2006, the interest will only be treated as
forming part of their estate for IHT purposes if it is one of the
following.
- Immediate Post Death Interest – defined by IHTA/S49A as an interest in possession in settled property to which an individual becomes beneficially entitled to an IIP under a Will or intestacy where:
-
- they became beneficially entitled to the interest on the death of the testator or intestate, and
- the settled property does not fall within S71A (trusts for bereaved minors – IHTM42815) and has never done so since the individual became beneficially entitled to the interest in possession, and
- the interest is not a disabled person’s interest (IHTM42805) and has never been so since the individual became beneficially entitled to it
- Disabled Person’s Interest – defined by IHTA84/S89B. There are four sets of circumstances where such an interest may arise:
-
- where there is no interest in possession in settled property, and the trusts secure that not less than half of the settled property which is applied during the life of the disabled person must be applied for their benefit;
- where a disabled person becomes beneficially entitled to an interest in possession on or after 22 March 2006;
- where a person with a condition that may reasonably be expected to lead to a disability settles property on trusts that provide that, if any of the settled property is applied during their lifetime, it must be applied for their benefit,
- where a person with such a condition becomes beneficially entitled to an interest in possession on or after 22 March 2006 and they are the settlor.
- Transitional Serial Interest – defined by S49B, S49C, S49D and S49E. There are three sets of circumstances where such an interest may arise.
The transitional period to 6 April 2008 [S49C]
Where a person is beneficially entitled to an interest in settled property – “the current interest”, it will be a transitional serial interest if:
- The settlement commenced before 22 March 2006,
- Immediately before that date, the person or another person had an interest in possession in the settlement – “the prior interest”,
- “the prior interest” came to an end on or after 22 March 2006 but before 6 April 2008,
- The person became beneficially entitled to “the current interest” at this time, and
- The settled property does not fall within S71A (trusts for bereaved minors – IHTM42815) and the interest is not a disabled person’s interest ( IHTM42805).
Surviving spouse or civil partner settlements [S49D]
Where a person is beneficially entitled to an interest in possession in settled property – “the successor interest”, it will be a transitional serial interest if:
- the settlement commenced before 22 March 2006,
- immediately before that date, the person’s spouse or civil partner had an interest in possession in the settlement – “the previous interest”,
- “the previous interest” came to end on the death of the spouse of civil partner on or after 6 April 2008,
- the person became beneficially entitled to “the successor interest” at this time, and
- the settled property does not fall within S71A (trusts for bereaved minors – IHTM42815) and the interest is not a disabled person’s interest ( IHTM42805),
Life insurance trusts [S49E]
Where a person is beneficially entitled to an interest in possession in settled property – “the present interest” – and, on their becoming entitled to the interest, the settled property consisted of, or included, rights under a contract of life insurance, it will be a transitional serial interest if:
- the settlement commenced before 22 March 2006,
- immediately before that date,
- the settled property consisted of, or included, a contract of life insurance, and
- the person or another person had an interest in possession in the settlement – “the earlier interest”:
and either:
- “the earlier interest” came to an end on the death
of a person on or after 6 April 2008, and
- the person became beneficially entitled to “the present interest”
- at this time, or
- on the coming to an end of a later interest in possession if this, and any other interests in possession in between times, came to an end on the death of the person beneficially entitled to them:
or:
- the person became beneficially entitled to “the present interest”
- on the coming to an end of a transitional serial interest under S49C, or
- on the coming to an end of a later interest in possession if this, or any other interests in possession in between times, came to an end on the death of the person beneficially entitled to it, and
- the first in the chain of interests in possession was a transitional serial interest under S49C.
In addition:
- the rights under the contract of life insurance must have been
comprised in the settlement throughout the period beginning with 22
March 2006 and ending on the date on which the person became
entitled to “the present interest”; and
- the settled property does not fall within S71A (trusts for bereaved minors – IHTM42815) and the interest is not a disabled person’s interest ( IHTM42805).
