IPDI followed by flexible trust

If a will includes a flexible life interest for spouse with an overriding power of appointment creating discretionary trusts , a relevant property trust arises on the death of the spouse life tenant. When calculating the IHT exit charge
on the distribution after the spouse`s death is it worked out from the death of the life tenant in which case the charge will be low or from the death of the original Testator.

Is it better as a general rule to provide in wills that the discretion can only be exercised during the lifetime of the surviving spouse so that there are only absolute interests and no exit charges on appointment after her death? . The
problem then is that if the power is not exercised during the spouses lifetime (possibly because she dies shortly after the Testator) then the default provisions will apply which may run counter to the original Testators intention to allow there to be decisions
taken by the Trustees depending on the circumstances at the time.

Finula Allen



If the property is distributed shortly after the death of the surviving spouse then the IHT charge will be small. The charge is worked out from the death of the testator but the charge is time apportioned and no tax will be due for any complete calendar quarter that expired prior to the death of the life tenant.

If the trust fund includes property which will benefit from the residence nil rate band then it may be best not to have flexibility over the distribution of the property after the life tenant’s death, since it may prejudice the claim for the residence nil rate band. Other than that, the small IHT charge payable on distribution would seem to be a small price to pay for the extra flexibility.

Paul Davies
Clarke Willmott LLP