Statement of Practice E6
Published 1 April 1978
© Crown copyright 1978
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This statement sets out the effect for Inheritance Tax (IHT) of the exercise by trustees of a power to augment a beneficiary’s income out of capital.
In the normal case, where the beneficiary concerned is life tenant of the settled property this will have no immediate consequences for IHT. The life tenant already has an interest in possession and under the provisions of Inheritance Tax Act (IHTA) 1984 section 49(1) is treated as beneficially entitled to the property. The enlargement of that interest to an absolute interest does not change this position (IHTA 1984 section 53(2)) and it is not affected by the relationship of the beneficiary to the testator.
In the exceptional case, where the beneficiary is not the life tenant, or in which there is no subsisting interest in possession, the exercise of the power would give rise to a charge for tax under IHTA 1984 section 52(1), although on or after 17 March 1987 this may be a potentially exempt transfer, or a charge under IHTA 1984 section 65(1)(a). But if the life tenant is the surviving spouse of a testator who died before 13 November 1974, exemption might be available under IHTA 1984 Schedule 6 paragraph 2.
The exercise of the power would be regarded as distributing the settled property rather than as reducing its value, so that IHTA 1984 section 52(3) and section 65(1)(b) would not be in point.