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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Special trusts: 25 year test for A&M trusts

The 25 year test IHTA84/S71 (2)

This test for A&M trusts comes into effect on or after 15 April 2001.

The above test is additional to the usual two requirements for A&M trusts under S71(1)(a) and (b). It is considered that less than 5% of all A&M cases are affected by the 25-year test, because most cases satisfy the ‘one generation’ test.

Where the beneficiaries are grandchildren of a common grandparent (or children, widows or widowers of such grandchildren who were beneficiaries but had died before the time when, if they had lived -the grandchild- they would have taken a vested interest) then the 25 year rule has no application whatsoever.

If the ‘one generation’ test is not satisfied, for example where the settlor makes a qualifying A&M settlement for their grandchildren but includes within the beneficiaries the grandchildren of their brother, then the privileged treatment under S71 is restricted to 25 years from

  • 15 April 1976 if the main provisions (of what is now S71) were satisfied at that date, or
  • The date of settlement, or
  • The date when the main provisions of S71 became satisfied.
  • See S71(6) regarding ‘transitional provisions’.

Failure of the test

Where the settlement fails the 25 year test, a flat rate charge arises. (IHTM42802) The claim is made under S71(3)(a). The calculation of the tax is made under IHTA84/S70.

Ensuring the test is met

If the trustees have the power to do so, they can avoid the 25 year trap by ensuring that interests vest within the period. No claim to IHT arises if they do this.

Thus, if an appointment or resolution is made to bring the fund within the 25 year rule the trustees are not thereby bringing ‘relevant property’ into the privileged regime of S71 and thus incurring a charge under IHTA84/S65 (1). They are, rather, ensuring that their fund, which already satisfies the main provisions of S71, continues to satisfy it.

The 25 year rule is seemingly absolute. That is, the date is conclusive and no one has any power or discretion to allow any longer period.