The Categories Of Trust For Inheritance Tax Purposes

The inheritance tax treatment of trusts depends on what category the trust is in. This article sets out the different types of trust for inheritance tax purposes and the requirements that the trust needs to meet to fall within a given category.

The categorisation of trusts created on or after 22 March 2006

Qualifying interest in possession trust

In an interest in possession trust, the beneficiary has a right to benefit from the asset (usually this involves a right to receive the income, but it can also include the right to use or benefit from the asset) for a period of time, but the beneficiary is not entitled to the asset itself. Not all interest in possession trusts are qualifying interest in possession trusts.

If created on or after 22 March 2006, the following trusts will be qualifying interest in possession trusts:

1) an interest in possession trust created by the deceased’s will or under the rules that apply when there is no will or when the will does not deal with all of the assets (i.e. created on death)[1]

2) an interest in possession trust for the benefit of a ‘disabled person’[2] that meets certain requirements about how the income and capital may be applied during the disabled person’s lifetime[3]

3) where the interest in possession existed before 22 March 2006, a new interest in possession arises between 22 March 2006 and 5 October 2008, and the new interest immediately follows on from the previous interest in possession[4]

4) where the holder of the previous interest in possession dies after 5 October 2008 and the holder of the new interest is his spouse or civil partner[5] and

5) where the trust property is a life insurance policy and there has been an unbroken chain of interests in possession and the chain began with the death of the holder of the previous interest in possession or began with a transitional serial interest of the kind set out at paragraph (c).[6]

(3), (4) and (5) are all transitional serial interests.

Trusts for bereaved minors and 18-to-25 trusts cannot be qualifying interest in possession trusts.

Relevant property trust

If created on or after 22 March 2006, the following trusts will be relevant property trusts:

1) fully discretionary trusts,

2) interest in possession trusts created during the lifetime of the person who creates the trusts (the settlor) for the benefit of a beneficiary who is not disabled, and

3) a former accumulation and maintenance trust where the beneficiaries did not become entitled to the capital at or before age 25.

This is the default type of trust: trusts that are not qualifying interest in possession trusts, or one of the other types of trust, will be relevant property trusts.

Bereaved minors trust

Bereaved minors trusts are trusts that satisfy the following conditions:

1) they are created under a will or under some compensation schemes

2) the bereaved minor becomes entitled to both the income and the capital at or before age 18 and

3) the income or capital cannot be applied for the benefit of any other person (there is an exception if the amount applied is less than the lower of £3,000 or 3% of the maximum held in the trust during the tax year concerned).

If the beneficiary is a bereaved minor, the trusts that are automatically created by law when a person dies without a will or without disposing of all of their assets by will (i.e. on an intestacy) will also be bereaved minor trusts.

Age 18-to-25 trust

A trust meeting the following conditions will be an age 18-to-25 trust:

1) the trust is for the benefit of a person under age 25 at least one of whose parents has died

2) the trust must be created under the will of the deceased parent, step-parent, or other person with parental responsibility for the beneficiary, or must be created under certain compensation schemes

3) the beneficiary will become entitled to both the capital and income at an age greater than 18 but not greater than 25 and

4) the trust income or capital cannot be applied for the benefit of any other person (there is an exception if the amount applied is less than the lower of £3,000 or 3% of the maximum held in the trust during the tax year concerned).

Accumulation and maintenance trust

It is not possible to create an accumulation and maintenance trust on or after 22 March 2006.

The categorisation of trusts created before 22 March 2006

Qualifying interest in possession trust

If created before 22 March 2006, the following trusts will be qualifying interest in possession trusts if the same beneficiary continues to have the interest in possession:

1) any interest in possession trust.

Relevant property trust

If created before 22 March 2006, the following types of trust will be relevant property trusts:

1) fully discretionary trusts.

Bereaved minors trust

Bereaved minors trusts are trusts that satisfy the following conditions:

1) they are created under a will or under some compensation schemes

2) the bereaved minor becomes entitled to both the income and the capital at or before age 18 and

3) the income or capital cannot be applied for the benefit of any other person (there is an exception if the amount applied is less than the lower of £3,000 or 3% of the maximum held in the trust during the tax year concerned).

If the beneficiary is a bereaved minor, the trusts that are automatically created by the rules that apply when a person dies without a will or without disposing of all of their assets by will will be bereaved minors trusts.

A minor will be a bereaved minor if they are a minor and their parent, step-parent, or other person with parental responsibility for them has died.

Age 18-to-25 trust

A trust meeting the following conditions will be an age 18-to-25 trust:

1) the trust is for the benefit of a person under age 25 at least one of whose parents has died

2) the trust must be created under the will of the deceased parent, step-parent, or other person with parental responsibility for the beneficiary, or must be created under certain compensation schemes

3) the beneficiary will become entitled to both the capital and income at an age greater than 18 but not greater than 25 and

4) the trust income or capital cannot be applied for the benefit of any other person (there is an exception if the amount applied in the tax year is less than the lower of £3,000 or 3% of the maximum held in the trust during the tax year concerned).

If created before 22 March 2006, a trust meeting the following conditions will also be an 18-to-25 trust:

1) the trust was created by any settlor (i.e. the settlor does not need to be a parent, step-parent, or other person with parental responsibility for the beneficiary)

2) between 22 March 2006 and 5 April 2008 inclusive or when the amendments made to §ion 71 of IHTA 1984 by the Finance Act 2006 came into force on 6 April 2008, the trust ceased to qualify as an accumulation and maintenance trust and

3) since the trust ceased to qualify as an accumulation and maintenance trust, the following conditions have been met:

a) the assets continue to be settled property,

b) the assets have been held on trust for the benefit of a person under the age of 25,

c) the beneficiary will become entitled to both the capital at income at an age greater than 18 but no greater than 25 and

d) the trust income or capital cannot be applied for the benefit of any other person (there is an exception if the amount applied in the tax year is less than the lower of £3,000 or 3% of the maximum held in the trust during the tax year concerned).

Trusts that qualify as trusts for bereaved minors, accumulation and maintenance trusts, or qualifying interest in possession trusts cannot be 18-to-25 trusts.

Accumulation and maintenance trust

A trust created before 22 March 2006 will continue to be an accumulation and maintenance trust if it meets the following conditions:

1) the beneficiaries will become entitled to the capital at or before age 18,

2) no beneficiary has an interest in possession before that age,

3) the income must be retained in the trust or used for a beneficiary’s benefit, and

4) the trust has existed for less than 25 years or all of the beneficiaries are grandchildren of a common grandparent (or children, widows, widowers, or surviving civil partners of grandchildren that died before they became entitled to the capital).

Prior to 6 April 2008, the same conditions applied except a trust where the beneficiaries would become entitled to capital at or before 25 could be an accumulation and maintenance trust. If such a trust, was changed so that it complied with the above conditions by 6 April 2008, that would continue to be an accumulation and maintenance trust.

Trusts for bereaved minors cannot be accumulation and maintenance trusts.

[1] The beneficiary of such a trust has an immediate post death interest.

[2] There is a specific legal definition of ‘disabled person’.

[3] The beneficiary of such a trust has a disabled person’s interest and the trust is called a disabled person’s interest trust.

[4] The beneficiary of such a trust has a transitional serial interest. There are also other types of transitional serial interest.

[5] The beneficiary of such a trust has a transitional serial interest. There are also other types of transitional serial interest.

[6] The beneficiary of such a trust has a transitional serial interest. There are also other types of transitional serial interest.