Trust created by a variation: short term interests disregarded
There is a special provision, IHTA84/S142(4), where an IHTA84/S142(1) variation results in property being held in trust for a person for a period which ends no more than two years after the death. In this situation, for IHT purposes you should in effect
- disregard the short-term interest, and
- charge tax on the death as if the interest having effect at the end of the period had had effect from the beginning.
In Scotland, property which is subject to a proper liferent is deemed to be held on trust for the liferenter for the purposes of IHTA84/S142(4).
Janet by will gives a life interest in a house to her spouse, with remainder to her children. By an instrument of variation (IoV) within IHTA84/S142(1) the spouse’s life interest is reduced to a period of eighteen months from the death, with the children’s interests brought forward accordingly.
Under IHTA84/S142(4) you should charge tax as if the children had taken the house immediately on Janet’’s death. It is not spouse exempt.
Toby by will gives the whole estate to the spouse absolutely. By an IoV the spouse settles part of the estate on trust for an elderly relative for a period of twenty months from the death, with remainder back to the spouse, the original beneficiary.
Under IHTA84/S142(4) you should disregard the short-term interest given to the elderly relative. The whole estate is spouse exempt on Toby’s death.
For IHTA84/S142(4) to apply, the short-term interest has to be the result of the variation itself, not of the variation as affected by other events. This follows from the wording used in subsection (4) - ‘where a variation . . . results’. So IHTA84/S142(4) does not apply where a variation creates an interest which
- is not limited to cease within the IHTA84/S142(4) period, but
- does in fact cease within that period because of some other event, for example, where a life tenant dies.
By will Ruth leaves the whole estate equally to her children. By an IoV within IHTA84/S142 (1) the children settle £200,000 out of the estate on trust for Ruth’s spouse for life with remainder to themselves. Ruth’s spouse dies within two years of Ruth’s death.
IHTA84/S142(4) does not apply. The interest conferred on the spouse was not limited to cease within the two-year period. The fact that it did cease within that period because of the spouse’s death does not bring the variation within IHTA84/S142(4). The £200,000 settled on the spouse by the variation is spouse exempt.