IHTM42226 | The settlement: class of beneficiary

Normally the settlement deed specifies a broad class of beneficiaries and the trustees have a choice of where they can exercise their powers of appointment.

Occasionally however, the class is reduced to such an extent (often by deaths of the others) that there is only one object/beneficiary. Does that single object/beneficiary have an interest in possession (IIP)?

Re Trafford [1984] 1 AER 1108 is considered to have provided an answer of general application

• if there is only one object/beneficiary and the class is open, the trust remains discretionary (there is no IIP).

• if the class is closed the sole object does have an IIP. A closed class means that all potential beneficiaries have been identified and no future beneficiaries can turn up/be added.

Inheritance Tax (IHT) implications

It follows that if the class is closed, as above, then

• the removal of the second-last object (by death or any other event) and the trustees can no longer accumulate, means that the fund goes from discretionary to IIP.

Prior to 22 March 2006 this will have given rise to an exit charge under IHTA/S65 but if the settlement continues any IIP arising will almost certainly be a non-qualifying interest. A claim to IHT must arise under IHTA84/S65 (1)(a) when the IIP vests in the last one standing.

If the class is open, the removal of the second-last object makes no difference. It was ‘discretionary’ before and remains so.