What is an Immediate Post Death Interest?
Immediate post-death interest (IPDI) was defined under The Finance Act 2006. It is an interest in possession trust where an individual has the interest in possession of settled property and:
- This settlement was affected by a Will or under Intestacy.
- The person who is beneficially entitled became so on the death of the Testator or Intestate.
(Section 49A, Inheritance Tax Act 1984 inserted (22.3.2006) by Finance Act 2006 (c. 25))
An interest in possession trust is a form of legal agreement which according to Viscount Dilhorne in Pearson v IRC (1980) gives a beneficiary a “present right to the present enjoyment” to the bequeathed or devised asset. Or, in other words, the beneficiary has an immediate right to the income generated from the asset held in trust (or the right to enjoy the asset in another way, for example by living in the property) for the present time. The time limit is, often, the lifetime of the beneficiary, however it can be for another ‘fixed’ time, and this time might also end when certain circumstances arise. For example, these trusts might be structured so that a surviving spouse has a right to receive an income for the rest of his or her life or until they re-marry.
How would an Immediate Post Interest (IPDI) be used?
A classic example for use of an IPDI is that of a married couple, one or both of whom have been married before and have children from a previous relationship. Under the Will of the first to die he or she may set up an IPDI allowing the surviving spouse the trust income for life but preserving the asset or the trust capital. When the surviving spouse dies the trust ceases and the capital will then pass to the children of the first to die.
This allows for the second to die to receive an income or be allowed to live in a property but on their death the children from the previous relationship still receive an inheritance from their parent.
The surviving spouse would be the ‘life tenant’ and the children would be the ‘remaindermen’.
There are, of course, other ways in which an Immediate Post Death Interest can be used.
Taxation of the Assets held in the IPDI Trust
Many Trusts hold property that is known as ‘relevant property’. When assets (for example, money, shares or property) are held in trust as ‘relevant property’ tax may be due on the assets. This usually occurs when:
- The assets are transferred out of the trust (this is known as an exit charge)
- Or when the ten year anniversary of the Trust occurs
Assets held in an IPDI trust do not count as ‘relevant property’ and, as such, are not subject to this tax regime.
However, instead, even though the property does not actually belong to him/her, for Inheritance Tax purposes, the ‘life tenant’ is treated as if s/he owned the property. This being the case, when the ‘life tenant’ dies the asset or assets in the IPDI are aggregated to his estate and Inheritance Tax is due on the whole amount (minus any Nil Rate Band allowances).
When to use an IPDI in a Will
Setting up an IPDI allows for someone to benefit immediately on the death of the Testator (person writing their Will) whilst conserving the value of the trust property for others to benefit later on. With the increasing blended family arrangements, IPDIs are becoming ever more popular especially for married couples where one or both of whom have been married before or have children from a previous relationship.
IPDIs are also useful for allowing the Testator’s wishes to be achieved if they wish to protect one of their children in the short term but do not wish to cut their other children out of their Will. An example of this is to give one of the children the right to live ‘rent free’ in a property after the parent has died for a given amount of time (for example, three years) before the house would need to be sold and divided between all the siblings (although there may be IHT issues if the property is valued over the Nil Rate Band). Thus, provision can be made for the income generated by Trust assets to those in financial need in the years following the death of the Testator yet still eventually being given to all of whom the Testator would wish to inherit.
In some instances Inheritance Tax issues can also be relieved because when using an IPDI the Nil Rate Band of the first spouse to die is preserved should future governments increase in the Nil Rate Band amount and IHT planning can be carried out by the Trustees partly terminating the IPDI in favour of children as these distributions will be considered as Potentially Exempt Transfers for IHT purposes.
Further, payments can be made from the IPDI Trust to the ultimate beneficiaries (‘remaindermen’) at such times that the Testator established in their Will. For example, the trust might end if the life tenant remarries or needs to go into a care home.
If it is wished by the Testator a clause can be drafted into the Will allowing the Trustees, if appropriate, to simply terminate the Trust and give the capital to the surviving spouse, thus achieving the same effect as if an outright gift had been given to the surviving spouse in the Will.
Drafting your Will to include an IPDI
Using an IPDI is an expedient way of allowing a Testator’s wishes to be carried out; allaying any fears he or she may have regarding the ultimate devolution of his or her estate and, alongside this, creating some tax efficiency. However, an IPDI requires careful drafting. If not drafted correctly a Testator may find he has created an IPDI where he didn’t wish to create one or (because of the statutory presumption in s22 of the Administration of Justice Act 1982) not have created an IPDI when he did wish to create one.
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