Charging provisions:
IHTM04102
Following the changes in Finance Act 2006 to the IHT rules
for trusts, there are now four types of “disabled
person’s interest” under S89B.
Transfers of value into type 1 and type 3 trusts are PETs
under s3A(1) and (1A) IHTA. Self- settlements into type 2 and type
4 trusts are not chargeable occasions for IHT purposes because the
property is treated as remaining in the settlor’s estate.
This applies to property settled after 9 March 1981 in which
there is no interest in possession.
Not less than half of the settled property which is applied
during the life of the disabled person must be applied for their
benefit.
IHTA84/S89 (2) provides that the disabled person is to be
treated as beneficially entitled to an interest in possession in
the settled property. The deemed interest in possession is treated
as part of the disabled person’s estate for IHT purposes by
virtue of S49(1) and (1A) and is subject to the normal claims and
exemptions on death or on termination in lifetime (
IHTM04082 and
IHTM04083 +).
This special treatment of trusts can apply even if the
disability ceases, for instance because the patient is restored to
mental health or no longer receives an attendance allowance. It is
sufficient that the person was within the conditions for
‘disabled’ treatment when the property was transferred
into settlement. IHTA84/S89(4)
A disabled person can set up a trust for themselves, possibly
to hold proceeds of an insurance policy. They have not disposed of
a beneficial interest as they effectively retain an IIP, so there
is no charge to inheritance tax.
This applies to property settled on or after 22 March 2006 by a
person who satisfies HMRC that they have a condition that could
reasonably be expected to their becoming disabled.
The property must be held on trusts under which there is no
interest in possession and, if any settled property is applied
during the life of the settler, it must be applied for their
benefit.
If the trusts can be brought to an end during the
settlor’s life, then:
S89A(4) provides that the settler is to be treated as
beneficially entitled to an interest in possession in the settled
property. The deemed interest in possession is treated as part of
settlor’s estate for IHT purposes by virtue of S49(1) and
(1A) and is subject to the normal claims and exemptions on death or
on termination in lifetime (
IHTM04082 and
IHTM04083 +).
Where it is claimed that S89B(1)(b) – or S89B(1)(d)
(see numbered paragraph 4 below) – is in point, we would
expect to see evidence, such as a contemporaneous certificate from
a medical practitioner, that the settler was suffering at the time
of the settlement from a condition that could reasonably be
expected to lead to their becoming disabled within S89(4)(a)-(c)
– see the definitions below.
This applies to actual interest in possession to which a disabled person becomes beneficially entitled on or after 22 March 2006. The interest in possession forms part of the disabled person’s estate for IHT purposes by virtue of S49(1) and (1A) and is subject to the normal claims and exemptions on death or on termination in lifetime ( IHTM04082 and IHTM04083 +).
This applies to actual interests in possession, where property
is settled on or after 22 March 2006 by a person who satisfies HMRC
that they have a condition that could reasonably be expected to
lead to their becoming disabled.
The property must be held on trusts which secure that, if any
settled property is applied during the life of the settler, it must
be applied for their benefit.
The interest in possession forms part of the disabled
person’s estate for IHT purposes by virtue of S49(1) and (1A)
and is subject to the normal claims and exemptions on death or on
termination in lifetime (
IHTM04082 and
IHTM04083 plus).
IHTA84/S74 applies to property settled before 10 March 1981 and
held on trusts under which, during the life of a disabled person,
no interest in possession subsists and which secure that any of the
settled property which is applied during his life is applied
‘only or mainly for his benefit’.
The trustees can exercise their powers of advancement under
Trustees Act 1925/S32 to advance settled property to other objects
provided the amount paid does not exceed half of the presumptive or
vested interest of that trust fund.
The implications for this type of trust are that the property
is not treated as interest in possession and therefore the value of
the fund does not aggregate with the free estate for the purposes
of any death estate claim.
The flat rate charge (
IHTM42802) applies when
A disabled person means one who
The attendance allowance (above) is payable only to a person who
A person is entitled to the care component of a disability living allowance at the highest or middle rate if he
The definition of a disabled person was extended by Finance Act 2006. The definition now includes individuals who are sufficiently disabled to have received the relevant allowances but did not meet the conditions because of non-residence in the UK or residence in ‘paid for’ accommodation.
