#13761 - Special Tax Treatment Bmt - Private Client

More often than not Trusts are made to provide for those who are left behind (children.)

Disable Beneficiary — s89

Immediate Post-death Interest — s49A

Bereaved Minor — s71A

Bereaved Young Person — s71D

DISABLED BENEFICIARIES - s89

Usually drafted as discretionary so they don’t interfere with other benefits.

- Provided at least half of any capital applied is applied for the disabled beneficiary the settlement will be treated for IHT as if creating a qualifying IIP.

so the B is treated as entitled to the underlying trust capital, which means:

no exit charges

no anniversary charges

lifetime transfer to the trust treated as a PET not an LCT (so no 20%) but the fund will be treated as part of their estate when they die.

IMMEDIATE POST-DEATH INTERESTS — s49A

Most settlements created after 22 March 2006 would amount to a relevant property settlements. However, an IIP can still be created on death so long as the interest qualifies as an immediate post-death interest [IPDI] under s49A:

IIP created on death (will or intestacy)

B must become entitled to the IIP immediately (there must be no intervening interest)

• could be original B or a substitute if original B is dead/ does not survive survivorship clause

• a survivorship clause does not stop an interest being immediate unless it is more than 6 months — then it will create a relevant property settlement

• can still be entitled immediately if trustees have a power to terminate B’s interest

Tax?

Inheritance Tax: B with the IPDI is treated as beneficially entitled to the trust capital.

Capital Gains Tax: if trustees appoint funds to B absolutely = deemed disposal

• Hold-over relief under s260 is available when transfer would otherwise be charged to IHT so as to create an RPS.

• Hold-over relief under s165 might be too if assets qualify as business assets

Income Tax: B with a IPDI is treated as having a right to income so usual rules apply.

SETTLEMENTS FOR BEREAVED MINORS — s71A

These are set up on death for the benefit of the deceased minor children.

Requirements

created on death (will or intestacy)

for the deceased own child (or charity)

(NB can have settlement where more than one of the deceased own children have interests)

the bereaved child must become entitled to income and capital at or before 18

(NB the power to advance capital still applies/ will not affect status)

it must not be possible to pay capital to anyone else – can advance to minor (71A(4)

it must not be possible to pay income to anyone else (s71A(3) to minor or NO ONE)

(NB accumulate it – for child)

no anniversary charges

cannot be a “settlement by lifetime transfer”

no exit charges — whether when child become entitled to capital under the terms of the settlement or if it is advanced early for the child benefit

no charge to IHT if the child dies before becoming entitled to the capital

TRUSTS FOR BEREAVED YOUNG PEOPLE — s71D

Requirements

created on death (will or intestacy)

for the deceased own child (or charity)

(NB can have settlement where more than one of the deceased own children have interests)

the bereaved child must become entitled to income and capital at or before 25

(NB the power to advance capital still applies / will not affect status)

it must not be possible to pay capital to anyone else: can advance whole of capital (71D(7)

it must not be possible to pay income to anyone else (71D(6))

(NB accumulate it – for child)