IHTM35133 | Trust created by a variation: short term interests disregarded

There is a special provision, IHTA84/S142(4), where an IHTA84/S142(1) variation results in property being held in trust for a person for a period which ends no more than two years after the death. In this situation, for IHT purposes you should in effect

• disregard the short-term interest, and

• charge tax on the death as if the interest having effect at the end of the period had had effect from the beginning.

In Scotland, property which is subject to a proper liferent is deemed to be held on trust for the liferenter for the purposes of IHTA84/S142(4).

Example 1

Janet by will gives a life interest in a house to her spouse, with remainder to her children. By an instrument of variation (IoV) within IHTA84/S142(1) the spouse’s life interest is reduced to a period of eighteen months from the death, with the children’s interests brought forward accordingly.

Under IHTA84/S142(4) you should charge tax as if the children had taken the house immediately on Janet’’s death. It is not spouse exempt.

Example 2

Toby by will gives the whole estate to the spouse absolutely. By an IoV the spouse settles part of the estate on trust for an elderly relative for a period of twenty months from the death, with remainder back to the spouse, the original beneficiary.

Under IHTA84/S142(4) you should disregard the short-term interest given to the elderly relative. The whole estate is spouse exempt on Toby’s death.

For IHTA84/S142(4) to apply, the short-term interest has to be the result of the variation itself, not of the variation as affected by other events. This follows from the wording used in subsection (4) - ‘where a variation . . . results’. So IHTA84/S142(4) does not apply where a variation creates an interest which

• is not limited to cease within the IHTA84/S142(4) period, but

• does in fact cease within that period because of some other event, for example, where a life tenant dies.

Example 3

By will Ruth leaves the whole estate equally to her children. By an IoV within IHTA84/S142 (1) the children settle £200,000 out of the estate on trust for Ruth’s spouse for life with remainder to themselves. Ruth’s spouse dies within two years of Ruth’s death.

IHTA84/S142(4) does not apply. The interest conferred on the spouse was not limited to cease within the two-year period. The fact that it did cease within that period because of the spouse’s death does not bring the variation within IHTA84/S142(4). The £200,000 settled on the spouse by the variation is spouse exempt.