Life interest will trust terminating to a discretionary trust after 6 months

I have a tax planning scenario where the estate exceeds £5m, so the RNRB is not available. Spouse is considerably younger than the testator and we are weighing up the possibility of drafting the Will so that the younger spouse is given a life interest to qualify for the spouse exemption, which then terminates to a discretionary trust after 6 months with the surviving spouse and children as potential beneficiaries of this discretionary trust.

The aim being to benefit from the spouse exemption and, if the spouse survives by 7 years, a tax free transfer into the relevant property regime from which the surviving spouse can still benefit. Insurance could be taken out on the spouse’s life to cover the tax liability if they did not survive 7 years from the termination of the LIT.

I do have a few concerns here, the first being whether this could be viewed as a CLT by the surviving spouse into the discretionary trust thus triggering the lifetime rate of IHT; the second being whether given that the life tenant will be a potential beneficiary there could be a reservation of benefit; and finally, could there be issues with the spouse exemption given that the life interest will only last for 6 months before terminating into the discretionary trust.

Your thoughts on the potential effectiveness of the above plan and the risk / pitfalls would be really appreciated whilst I look into this further.

  1. Yes, i’m pretty sure it would be a CLT
  2. Yes, it’s a GROB under s.102ZA
  3. Not sure but I believe HMRC have a published view on short term fixed life interests (they don’t like them!). Try the IHT Manual.