Flexible life interest trust and IHT

The settlement was created in Settlor’s lifetime in 1998. The Settlor transferred her property into the Trust and gave herself and her husband a life interest in the property. On death of both of them, the property then passes into a discretionary trust with children and grandchildren as potential beneficiaries.

To clarify husband died years ago. Settlor has now died and value of the property was declared in IHT400.

The surviving Trustees (being two of the children) now wish to terminate trust in favour of them and other siblings.

Although it is now over 20 years since the trust was created, would the exit charge only be on the value of the assets in trust (ie the property) from date of death to date of appointment (ie no anniversary charges to be declared).

Also IHT was payable on settlors death as a result of her having life interest. Does that mean an exit charge will also be payable even if value of assets in DT are appointed out within short period of time after death?

Value of property is approx £700,000.

There will be an exit charge. The rate will be the rate that would have been charged if the property had been relevant property (at its current value) at the last 10 year anniversary (in 2018). The charge will be time apportioned and any quarter date that ended prior to the death of the surviving life tenant will not be counted (but subject to there being a minimum of one quarter falling into charge). Accordingly the tax charge will be very small if the trust is wound up soon.
The exemption from IHT for assets appointed from a discretionary trust within two years of death applies only if the property was settled by the person’s will, so it does not apply in this case.