The deceased provided for a discretionary trust to be created on his death. If trustees use their discretion to give all net rental income to 3 beneficiaries each month (as opposed to on an annual basis) - would HMRC deem those beneficiaries to have received a life interest and the value then aggregated with their estate for IHT purposes?
Would it make any difference if the beneficiaries received the net rental income each month directly from the estate agent rather than from the trustees?
Any trust created on or after 22 March 2006 is a relevant property trust unless it creates an interest in possession of which the most common is an IPDI: ss49 and 49A IHTA. The Will itself must create the IIP not an appointment by the trustees save under s144 within the 2 year period. Once that period has expired it is not possible for the trustees to create a QIIP for IHT.
The existence of a mandate is essential or else the trustees will be liable at trust income rates up to 45%.A mandate can only be given in respect of a beneficiary who has a right to income and not only at the discretion of the trustees. So thy must first use their powers under the DT to grant an IIP.
Creating and if revocable revoking an IIP does not create any IHT chargeable events in an RPT nor any CGT deemed disposals. A grant to a minor should exclude s31 TA 1925 if the trust is governed by English law: TSEM1568.
Thank you Jack - the trustees want to ensure that an IIP is not created so that the value of the properties do not form part of the beneficiaries’ estates for IHT purposes - I understand, therefore, that the income cannot be mandated and the trustees will then be liable at the higher rate, but that the beneficiaries can reclaim tax paid if they are lower rate tax payers and the income does not push them into the higher bracket.
If the income is not mandated, does this mean that the trustees would have to receive it first from the agents (net of expenses) and then transfer to the beneficiaries, or can the agent pay the net rental income directly to the beneficiaries?
Once 2 years has elapsed since death, s.144 IHTA 1984 will no longer apply, at which point the executors/trustees could appoint a non-qualifying interest in possession to the beneficiaries.
The trust would remain within the IHT relevant property regime and the income could be mandated direct to the beneficiaries without being liable to tax at yhe trust rate as they would then be entitled to the income as it arises.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
If the trust is a RPT now it is impossible for the trustees to create a QIIP which would have the effect of the beneficiary owning a part of the trust fund for IHT. This is so provided 2 years have elapsed after the date of death.
It is possible to create a NQIIP for IHT which will entitle the beneficiary to a share of income from the whole estate or just from a rented property. Often these are revocable for flexibility rather than irrevocably for life or a fixed period. The income can then be mandated. Their creation and revocation do not cause IHT chargeable events or deemed disposals for CGT.
It is important to do it 2 years or more after the death or s.144 will create a QIIP which is what you want to avoid.
The 2nd anniversary is in March 2026 and as the property has not yet been transferred to the trustees, I understand that until any appointments have been made, the rental income until then can still be treated as estate income?
The executors/trustees/beneficiaries (all the same people) might of course decide to wind the trust up in the interim and simply appoint the properties to the beneficiaries (albeit their main aim to date has been to take advantage of the protection of assets/flexibility the discretionary trust provides them with).
Yes it is “estate income” if it arises in the admin period. The termination of the AP is not unitary as it applies to each and every asset. It is also dependent on the vague factual question of when that asset ceases to be needed for administration. The Estate Police offer their views on when the AP ends in TSEM6071 and 7360 but the best guidance is in CG30700-20 and 30780-30800.