Beware s55 IHTA. The money which the life tenant pays will be a PET. Although it looks like an arm’s length arrangement (for full consideration and not intended to confer any gratuitous benefit - s10 IHTA), that is not what happens for IHT purposes.
Suppose the life tenant’s (L) estate is £500,000 and the trust fund (an IPDI) is worth £250,000. Suppose L has NRB of £650,000 available to him (by virtue of the TNRB - let’s ignore RNRB) and that he proposes to pay the remainderman ® £100k for the remainder interest.
- To begin with, L’s estate for IHT purposes is £750k, on which there will be £40k (IHT) on his death (40% of £100k excess over the NRBs).
- R assigns the remainder interest to L. This results in no change to L’s estate for IHT purposes - he still has his own £500k plus the £250k trust fund (now his too) - the reversionary interest is not treated as an additional chargeable asset in L’s hands.
- But, in return for the assignment, L pays R £100k. As a result, L’s own estate in fact reduces from £500k to £400k. That £400k plus the £250k trust fund means that his IHT estate is now only £650k - within his NRBs and so no IHT to pay on his death.
But… because of s55 and the disapplication in it of s10 IHTA, the payment of the £100k by L to R is treated as a PET, because the transaction causes L’s IHT estate to be reduced.
Also, the transaction causes the trust to come to an end, so there could be CGT implications (although PPR may apply).
As others have mentioned, SDLT may also be relevant.