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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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The settlement: class of beneficiary

Normally the settlement deed specifies a broad class of beneficiaries and the trusteeshave a choice of where they can exercise their powers of appointment.

Occasionally however, the class is reduced to such an extent (often by deaths of theothers) that there is only one object/beneficiary. Does that single object/beneficiaryhave an interest in possession (IIP)?

Re Trafford [1984] 1 AER 1108 is considered to have provided an answer of generalapplication

  • if there is only one object/beneficiary and the class is open, the trust remains discretionary (there is no interest in possession).
  • if the class is closed the sole object does have an IIP. A closed class means that all potential beneficiaries have been identified and no future beneficiaries can turn up/be added.

Every case is decided on its own facts. Refer any cases where you consider there may bean interest in possession to your manager.

Inheritance tax implications

It follows that if the class is closed, as above, then

  • the removal of the second-last object (by death or any other event) and the trustees can no longer accumulate, means that the fund goes from discretionary to IIP.

A claim to inheritance tax must arise under IHTA84/S65 (1)(a) when the IIP vests in thelast one standing.

If the class is open, the removal of the second-last object makes no difference. It was‘discretionary’ before, and remains so.