Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
, see all updates

Interests in possession: Absolute trusts for minors (England and Wales)

In relation to trusts for minors, the provisions of s.31 Trustee Act 1925 will usually apply during the minority of a beneficiary. This means that the trustees will have discretion to apply the income of a trust fund for the maintenance, education or benefit of a beneficiary. Under s.31 (2) Trustee Act 1925, any surplus income must be accumulated.

This raises the question whether an absolute trust for a minor can be regarded as a ‘settlement’ for IHT purposes under s.43 (2) IHTA, given that this provides that a settlement includes any disposition whereby property is held:

“on trust to accumulate the whole or part of any income of the property or with power to make payments out of that income at the discretion of the trustees” (IHTA84, s.43 (2)(b)).’

In our view, an absolute trust of this kind is not a settlement for IHT purposes. S.31 Trustee Act, including s.31 (2), contains provisions which are essentially administrative in nature rather than dispositive. The trustees’ discretion in relation to an absolute trust is limited to deciding how much income they spend for the benefit of the beneficiary and how much they retain on the beneficiaries behalf.

The express trusts in such a case will remain for the minor beneficiary absolutely - that is, the beneficiary has an immediate and absolute right to both capital and income, and only their minority will prevent them for requiring the trustees to convey the trust property to them. Any accumulations will be held for the beneficiary if they attain 18 or (by virtue of the original gift, not s.31 Trustee Act) for their estate if they die under that age. The trust property will form part of the beneficiary’s estate for IHT purposes.

As a result, a lifetime gift on trust for a minor absolutely, whether or not the provisions of s.31 Trustee Act are excluded, is a potentially exempt transfer.