IHT Liability on absolute giftover from qualifying interest in possession trust

If a married couple create Wills that Grant the survivor an interest in possession of the entire estate (immediate post death interest) with absolute gift over to their children after a period of (say) 3 years, who is liable for the inheritance tax if the survivor fails to survive that giftover over by 7 years?

Specifically the giftover to the remaindermen at 3 years will be treated as a potentially exempt transfer by the survivor. However, when a PET comes from a qualifying interest in possession trust, the trustees are usually liable for all tax charges within the trust. Certainly if this was not an absolute gift over but, say, a distribution made using overriding powers, the trustees would have to hold back funds sufficient to discharge the IHT in these circumstances (or obtain indemnities from the beneficiaries, life insurance etc if they were happy to do so). What is not clear to me is whether the trustees are able to hold that sum back when the giftover is absolute? If they do hold those funds back and the survivor does survive by 7 years, such that no IHT charge is triggered on the first PET, and then distribute those funds, is that a further PET that needs to be survived by 7 years?

The trustees in both cases withhold funds under their possessory lien. There is no further PET once the funds are released - they always belong to the absolute beneficiaries, just subject to the lien.

Makes sense, many thanks Andrew

The lifetime termination of a QIIP (eg IPDI) as in the above case gives rise to an IHT charge under IHTA 1984 s52; the QIIP beneficiary being deemed to have made a PET, the trust having terminated.

In view of this potential charge the trustees should not transfer the relevant assets without taking appropriate steps to ensure any charge will be discharged.

Malcolm Finney

An alternative to the retention of assets may be a policy of assurance on the life tenant. I understand that a number of insurers provide policies specifically to cover the potential IHT liability should a PET fail.

Despite the fact that the trustees are the primary party liable for the IHT, they do not have an “insurable interest” and any such policy may need to be taken out by the life tenant and assigned to the trustees. The premium should be paid out of the trust fund (as the price of the beneficiaries absolutely entitled being able to take all of the assets freed from the trustees’ lien).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thanks Paul. I assume if the trustees do exercise their lien then, retaining funds that then generate income or gains, those should be declared by the beneficiaries personally and are not taxable within the trust?

The remaindermen become absolute owners at the end of the 3 year period. As a consequence, any income/gains accruing after the 3 year period are beneficially those of the remaindermen whether a retention of funds occurs or not.

No doubt Paul will confirm agreement or otherwise.

Malcolm Finney

I agree with Malcolm’s analysis.

I would add, though, that upon the termination of the IPDI in addition to that event being a PET by the life tenant for IHT purposes, a charge to CGT will arise under s.71 TCGA 1992 on the deemed disposal by the trustees. The gains cannot be held over except in relation to business assets qualifying under s.165 TCGA 1992.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals