| Precatory Trusts | A beneficiary passes assets they have been left in a will to other people in accordance with a record of wishes left by the testator. S.143 IHTA 1984: provided the beneficiary carries out the wishes within 2 years of death, IHT is charged as if the property had been left in accordance with the wishes of the deceased. |
| Wills Creating Two-Year Discretionary Trusts | S.144 IHTA 1984: if property is left on discretionary trust and an appointment, which would have led to an IHT charge, is made within 2 years, there is no exit charge on the appointment and instead the appointment is, in effect, read back into the will. -
Advantages: |
| Disclaimers | No one can be forced to accept a gift – beneficiaries can thus disclaim, but whole of the gift must be disclaimed. There is an automatic reading back for tax purposes*. The property passes in accordance with the will or intestacy and the original beneficiary has no control over who will ultimately benefit. |
| Variations | If a beneficiary does accept a gift, they are free to dispose of that property as they think fit – they can vary entitlement to that property (at any time). -
BUT if the property is accepted and then re-routed, there could be adverse tax consequences: PET for IHT purposes, so if they die within 7 years, it will eat into NRB Disposal for CGT, so if the asset has increased in value since death, there could be an immediate charge to CGT |
| * Reading Back for Tax Purposes separate elections can be made for IHT and CGT |
| Inheritance Tax – s.142(1) IHTA 1984 Where within two years after a person’s death, any of the dispositions of the deceased’s estate are varied or disclaimed in writing, they shall be read back and treated as though the variation had been effected by the deceased, or in the case of disclaimer, as though the gift had never been conferred. | Capital Gains Tax – s.62(6) TCGA 1992 Similar provisions apply for CGT – effect: It will not be treated as a disposal by the variator. Shall apply as if the variation had been effected by the deceased, or in the case of disclaimer, as though the gift had never been conferred. |
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| Advantages of Reading Back | Example: |
| To make full use of available reliefs | T, under his will, left: A pecuniary legacy of 425,000, subject to tax, to his only child, S (IHT is 40,000). A specific legacy of his 51% holding in T Ltd [worth 425,000] to his wife, W. Residue [worth 500,000] to wife for life, remainder to S. S could vary his legacy in favour of W, in consideration of her varying the interest in T Ltd in his favour, which through the availability of business property relief, would mean no IHT will be payable on the estate. |
| To avoid reservation of benefit rules | T, by his will, gives Greenacre to his daughter D. She gives Greenacre to her son G, within two years, but continues to reside there. |
| To take increases in value since death outside the IHT charge | |
