IHTM42229 | The settlement: property moving from one settlement to another

When property is transferred from one settlement to another, usually as a result of the trustees exercising a power of appointment or an assignment by a beneficiary, that property is treated as remaining in the first settlement but only for the purposes of the charges set out for relevant property trusts in Chapter III, Part III, IHTA84/S81

This means that ten-year anniversary (TYA) charges (IHTM42081) arise on the transferred property on the TYA of the commencement of the first settlement. This rule therefore prevents transfers to another settlement from avoiding the TYA charge by keeping the settlement intact.

The rule does not apply for the other purposes of the Inheritance Tax Act so that, e.g. the accountability and liability rules for the transferred property will be the responsibility of the recipient trustees.

Similarly, S81 does not mean that the trusts applying to the transferred property remain the same. It will be held on the terms of the recipient trust.

The transfer of property between settlements will rarely give rise to an exit charge. That is because either the property remains relevant property or there is a statutory exemption that applies, e.g. a transfer to a special trust such as a charitable trust or an employee benefit trust (see IHTA/S75, S75A & S76). However, if the recipient trust is, e.g. a disabled person’s trust then the property will then have become non-relevant property and a charge may arise.

Impact on excluded property

For times on or after 6 April 2025, excluded property for foreign assets can only be available if the settlor of the first trust is not a long-term UK resident.

Prior to then excluded property depended not only on the domicile of the settlor of the first trust but also

• the domicile of the settlor of the recipient trust or

• the domicile of a person who made an assignment of the trust property (or had exercised a general power of appointment).

These additional tests depended upon whether the inter-trust transfer was

• prior to 22 July 2020 or

• between 22 July 2020 and before 6 April 2025.

These tests are now repealed and guidance on these historic tests is at IHTM42603.