I am drafting a Will Trust for a testator and would like the option of appointing out of the IPDI for his widow within two years of his death, and for this appointment to have the reading back effect under S144 IHTA so that it is deemed to come from the Testator, and not a PET by her. (the assets to appoint will be those assets eligible for APR/BPR). However, I am concerned that this could be treated as a PET as the widow will effectively be giving up a share of her life interest. Presumably it depends on how the appointment is made and by whom, but I would like to be clear on this point. Any comments gratefully received!
s.144 IHTA 1984 will apply to avoid a PET arising.
Any of the usual form of flexible life interest trust should normally cover this situation, although the trustees will need to remember to exercise their discretion within 2 years of death, if reliance is to be placed on s.144 IHTA 1984.
When you come to appoint assets / funds from the IPDI to someone other than the life tenant, s.144 IHTA 1984 cannot apply as an interest in possession would have subsisted in the property. The appointment would constitute a PET as you suggest. What you want to achieve is a cake and eat it situation.
On the basis that you are concerned to re-direct assets eligible for APR / BPR then I would suggest that you would be better to carve those assets out and leave them on discretionary terms such that the spouse could benefit from them if, within the two year period for reading back it was considered necessary, otherwise they could be appointed out to other beneficiaries.
I believe that for s144 to apply, the action (the appointment you refer to) has to be undertaken within two years of death AND before any interest in possession exists. If it is a Qualifying Interest in Possession, then I do not believe the automatic readback will occur. s144 (1) and (1A).
S. 144 will not apply in the situation you describe. Carving out the BPR/APR assets is one way (probably the best way) to proceed. Alternatively it is common to have a two year discretionary trust (at the end of which the widow gets an IPDI in any remaining assets, which is read back under 144). Personally I sometimes don’t go quite that far, merely giving the trustees a power to accumulate income during the two year period (which has the same effect for IHT even if in practice the power isn’t used).
Either way, trust income will be subject to tax at the trust rate until the widow gets her interest in possession, and unless the re-arrangement of the estate can be done quickly post-death, there may be a necessity to pay IHT on the whole estate before obtaining the grant of probate, and then claim it back, which can cause cash-flow issues. It is good practice to include in the trust provisions a clause making it clear that the trustees can exercise their overriding powers before any grant of probate has been obtained.
Many thanks all for your very helpful comments. As often is the case what would be shortest and simplest for the client to read is not necessarily the most tax effective…
I was just looking through this thread as we have a similar scenario but from the other perspective. Spouse with an IPDI which includes a large amount of investments and a property (which was owned 100% by her husband - but the family house). If she no longer occupies the property then, per the will/trust deed, the house is to be sold and the monies distributed to the children. She has now gone into care so this has happened. We are still comfortably within the 2 year period. My reading of the legislation is that s144 wont apply (if a distribution is made within 2 years) and it will rather be a PET from the mother to her children. If s144 applied it would lead to an immediate tax charge as the NRB was used up. Would readers agree that this is a PET and not caught by any other provision?