The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
Where a beneficiary’s entitlement to trust property satisfies the definition of a qualifying interest in possession (QIIP), the trust property falls into the beneficial entitlement regime for inheritance tax purposes. See the Taxation of trusts ― introduction guidance note.
The inheritance tax treatment of trusts falls into two broad categories:
beneficial entitlement (bare trusts and qualifying interests in possession), and
relevant property (non-qualifying interests in possession and discretionary trusts)
Prior to 22 March 2006, all interest in possession trusts were included in the beneficial entitlement category, but changes introduced by FA 2006 transferred most lifetime interest in possession trusts into the relevant property category. Hence the beneficial entitlement treatment only applies to qualifying interests in possession. See the March 2006 changes to trust taxation guidance note.
The term beneficial entitlement refers to the inheritance tax treatment under IHTA 1984, s 49, which provides that a person beneficially entitled to a (qualifying) interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsides. This means, in effect, that the trust property is taxed as if it belonged outright to the beneficiary. All other trust property is subject to the special inheritance tax rules of the relevant property regime. See the Definition of relevant property guidance note and other notes in that sub-topic.
In summary, the consequences of the beneficial entitlement category are:
the full value of the trust property is subject to inheritance tax on the death of the beneficiary
the termination of the interest during the beneficiary's lifetime is a potentially exempt transfer (PET)
a transfer or conversion of the interest to a non-qualifying or discretionary interest is a chargeable lifetime transfer
the death of the beneficiary within seven years of termination or transfer of the interest will give rise to the additional charge on death
See the Definition of
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