Chapter: 2 - Inheritance Tax Mitigation: The Basics

Settlements

2.1.6

There are two main regimes for settled property, with a third, minor, regime, all of which are discussed at 2.3 and in more detail throughout Chapters 3 and 4.  The first is the ‘relevant property’ regime, which was introduced by CTT for discretionary trusts in 1975.  The trust is treated as a separate taxpayer and suffers ten year anniversary charges at up to 6%, with a system of exit charges on the withdrawal of capital between ten year anniversaries.  Second, the ‘section 49 regime’, which applies to all interest in possession trusts made before 22 March 2006 but only to certain interests in possession arising since that date, treats the beneficiary as absolutely entitled to the trust fund (IHTA 1984 s49(1)): hence, the professionally colloquial term ‘estate interest in possession’.  That means that, for example, on death of the beneficiary the trust property in which he has had a right to income is added to his free estate, and a single ‘estate rate’ is calculated, to be applied separately to the free estate and the settled estate (subject of course always to exemptions such as the spouse/civil partner exemption).  Third, introduced by FA 2006 with the demise of the accumulation and maintenance trust, is the ‘age 18-to-25 trust’ for children (or in certain cases grandchildren) of the settlor which has its own charging regime similar to the relevant property exit charges.