What was the inheritance tax (IHT) treatment on the creation of a life interest trust in 2005? What is the IHT treatment on the death of the life tenant of that trust (where two successive life interests for the settlor and settlor’s spouse) are appointed?

Prior to 22 March 2006, all life interest trusts (under which there was an immediate interest in possession) were essentially ‘transparent’ for inheritance tax (IHT) purposes ie the trust property was treated as though it belonged to the beneficiary with the interest in possession. If the person died, then the trust fund would be aggregated with the person’s free estate, and unless the transfer was exempt, the trustees would be responsible for paying their respective share of the total amount of IHT due.

On 22 March 2006 these rules changed. From that date, with very limited exceptions, trusts are subject to IHT under the rules applicable to ‘relevant property’ (ie the rules that applied prior to 22 March 2006 only in the main to discretionary trusts) regardless of whether a beneficiary