I have a Discretionary Trust where some years before a revocable life interest was given to one of the discretionary beneficiaries. That beneficiary is not looking like he will survive the next 7 years. If the trustees revoke the life interest, is that classed as a PET and therefore if he doesn’t survive 7 years the value be included in the beneficiary’s estate for IHT purposes?
If the life interest was created before April 2006 (you might want to check the exact month/day), it would be an interest in possession for tax and:
- if the fund is appointed outright to another beneficiary it is a PET
- if the fund reverts to the original trusts or is reappointed onto any new trusts, it’s a chargeable transfer
If the life interest was created after April 2006 (or thereabouts) it will be relevant property so not in the beneficiary’s estate. The revocation shouldn’t have any IHT implications.
Osborne Clarke LLP
Thanks Andrew, the original (discretionary trust) was created in 2009 and the revocable life interest created in 2014 so therefore it sounds as though there shouldn’t be any IHT implications, would this be different if the beneficiary died with that life interest in place still, because he would have been receiving a present right to present income at the day he died? I have revoked the life interest because I was too worried about it, but now wondering whether I should reinstate it!
Once a trust is within the IHT relevant property regime, I believe it is “difficult” to take it out. Possibly the creation of a disabled person’s interest might create a qualifying life interest, but you would need to double check, especially as this may give rise to an IHT exit charge.
Creating or revoking a life interest within a relevant property trust should have no IHT or CGT consequences, although appointing it out into a separate trust with an interest in possession will usually have CGT consequences (but not IHT unless perhaps there is a disabled person’s interest).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals