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IMMEDIATE POST DEATH INTEREST (IPDI)

19/03/2009

An immediate post death interest (IPDI), is a trust which is created under a Will or on intestacy where the life tenant became entitled to an interest in possession on the death of testator or intestate and s.71A IHTA 1984 does not apply to the interest and neither is it a disabled person’s interest (DPI). This condition has to be satisfied at all times since the person entitled to the income (life tenant) became entitled to the interest in possession – s.49A IHTA 1984.

Background

The Finance Act 2006 introduced a sea change in the inheritance tax treatment of trusts with effect from 22 March 2006. The traditional dichotomy between trusts with an interest in possession and those without was changed and by default all trusts are subject to the relevant property regime unless designated as ‘special’. Trusts which are special include the IPDI.

An IPDI is in effect an interest in possession trust created on the death of a person under their Will or on intestacy. It may be chosen because:

  • It provides a right to income or possession of property for say the surviving spouse or civil partner and allows other beneficiaries to benefit from the capital on the termination of the interest or on death of the life tenant.
  • When the deceased has been married before or has children from a previous relationship it allows the capital to be protected for those children but enables the deceased to provide for their second spouse.
  • Post 9 October 2007 it will not prevent a surviving spouse or civil partner being entitled to the transferable nil rate band of the deceased since the gift to an IPDI by a deceased in favour of a spouse or civil partner is exempt from inheritance tax.

Inheritance tax treatment

Pre-22 March 2006

It should be noted that before 22 March 2006 all trusts with an interest in possession were taxed in the same way for inheritance tax; namely s.49(1) IHTA 1984 applied to aggregate the capital of the trust fund with the personal assets of the life tenant and apply IHT on the death of that life tenant to the total, subject to the application of the life tenant’s Nil Rate Band (NRB). The resultant IHT bill was apportioned rateably between the trust and the personal estate of the life tenant.

This treatment applied whether or not the trust was created during the lifetime of the Settlor or on death.

Current

From 22 March 2006 only those interest in possession trusts which were in existence prior to that date remain in the s.49(1) IHTA 1984 regime; new interest in possession trusts created on or after that date will be in the relevant property regime unless they are IPDI trusts; DPI trusts or Transitional Serial Interest Trusts.

An IPDI trust, being a trust which arises on death, is one example of where the s.49(1) IHTA 1984 inheritance treatment remains the same. It can be created by Deed of Variation (s.142 IHTA 1984) or Deed of Appointment (s.144 IHTA 1984) made within two years of death, even though the deed obviously is drawn up post death it applies for IHT to the deceased’s estate on death. However, if an interest in possession is created out of a discretionary trust more than two years from the date of death it cannot be an IPDI because there is no reading back to the deceased. It will therefore not be special but a trust within the relevant property regime.

Where the life tenant is the spouse or civil partner of the deceased whose Will or intestacy is responsible for the coming into being of the IPDI then that gift to the IPDI will have the benefit of the s.18 IHTA 1984 exemption from inheritance tax.

Flexibility

An IPDI can contain overriding powers and so the tradition of drafting flexible interest in possession trusts continues by including powers to appoint, advance and re-settle.

If the powers are wide enough to terminate the interest in possession whilst the life tenant is still alive and without their consent (a draconian but useful tool to overcome the need to refer to the termination of an interest in possession on re-marriage, cohabitation or other such contingency which may be hard to police) then the powers do need to be fully discussed with the testator as to their effect and so he can choose appropriate trustees.

In such a case the intending testator should be encouraged to provide a separate letter of wishes in which, amongst other things, he should indicate the sort of circumstances in which he envisages his trustees exercising the powers.

The exercise of overriding powers can since 22 March 2006 cause a gift with reservation of benefit to arise under s.102ZA FA 1986 so care should be taken in certain circumstances.

Practice points

  1.  Whilst the deceased is often prepared to accept the application of the aggregation principle to have protection and security beyond the grave for the capital beneficiaries it is important for the practitioner to clearly state how it works so that the life tenant’s beneficiaries can be answered when they inevitably complain on the life tenant’s death that they have lost out by the ‘hi-jack’ of the life tenant’s Nil Rate Band.
  2.  Watch out for the inadvertent application of the IPDI treatment when making decisions and advising trustees of discretionary trusts in the two year period following the deceased’s death.
  3. Always check the tax treatment before making any transfers out of an IPDI trust in exercise of any overriding powers whilst the life tenant is alive.

© Gill Steel, LawSkills Ltd