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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Special trusts: Age 18-to-25 trusts

Finance Act 2006 introduced a new category of “age 18-to-25 trusts”, IHTA84/S71D.

The provisions of S71D are similar to those applying to a trust for bereaved minors (IHTM42815), but the beneficiary must receive absolute ownership of the settled property on or before their 25th birthday.

S.71 A&M trusts created before 22 March 2006 can also be amended to fall within these provisions.

A trust of this kind can only be set up on or after 22 March 2006 under:

  • the Will of a deceased parent, including where this is deemed to have happened – for example, following a Deed of Variation that satisfies the conditions of S142 (IHTM35021 +), or
  • the Criminal Injuries Compensation Scheme

Parent can include a step parent or a person who, immediately before their death had parental responsibility for the minor, S71H.

S.71 A&M trusts created before 22 March 2006 can also be amended to fall within these provisions (IHTM42808).

Other conditions

For as long as the beneficiary is alive and under the age of 25 they must be entitled to all of the income and, if any of the settled property is applied for the benefit of the beneficiary, it must be applied for the benefit of the beneficiary, S71D(6)(b) and (c).

On attaining the age of 25, or before, the person must become absolutely entitled to the settled property, any income arising from it, and any income that has arisen and accumulated from the property, S71D(6)(a).

Multiple beneficiaries

While S71D is drafted by reference to a single beneficiary (“B”), we take the view that it is possible to have more than one existing beneficiary, so long as it is not possible for any other person to become entitled under the trusts in future.

For example, the trusts of an existing A&M settlement provide that:

  • the three grandchildren – B1, B2 and B3 – of the settlor will take the trust assets absolutely at 25;
  • they will be entitled to all of the income arising before they reach 25; and
  • if any of the settled property is applied in that time, it must be applied for B1, B2 and B3.

If B1, B2 and B3 are all living when S71 ceases to apply, we take the view that s.71D will begin to apply provided that it is not possible for any other person to become entitled in future. This is because it can still be said that “B” – although plural – will become absolutely entitled to the settled property by 25 etc.

We do not, however, consider that s.71D will apply if someone other than B (plural or not) can become entitled in the future – for example, if the previous A&M settlement provided that any unborn grandchildren could benefit later. In those circumstances it could not be said that “B” (that is, the living grandchildren) will:

  • become absolutely entitled to the settled property at or before age 25;
  • be entitled to all of the income in the meantime; and
  • be the only persons for whom any of the settled property is applied

Tax consequences

If the provisions are satisfied then no charge to tax arises where

  • the beneficiary becomes absolutely entitled to any of the settled property on or before their 18th birthday, or
  • any property is applied for the maintenance of the beneficiary before they turn 18, or
  • the bereaved minor dies before they turn 18.

However, a charge to tax under s.71E, calculated under S71F, will arise where

  • the provisions of S71D cease to apply to the settled property where the beneficiary becomes absolutely entitled to it between 18 and 25, or
  • the beneficiary dies over 18 but under 25 Also, a charge to tax under S71E, calculated under S71G will arise in all other circumstances where S71D ceases to apply to any settled property

The calculation under S71F Where the provisions of S71D no longer apply to the settled property, or the beneficiary dies over 18 but under 25, the calculation follows the existing proportionate charges regime (IHTM42114) with a few important changes

  • The number of quarters is calculated from the day on which the beneficiary concerned attained 18. If the trust become subject to S71D at a date later than their 18th birthday then it is from this date that the number of quarters are calculated. (As the maximum period between the property becoming relevant and the trust concluding is seven years then the maximum charge that can arise under S71F is 7/10ths.)
  • The rate is calculated by reference to the historic value of the settlement at the time it is set-up. This is so even if the ten year anniversary has passed, because there is no ten year anniversary charge. [Charges up to ten years from set-up can be raised on Compass. Where more than 10 years have passed since set-up, the charge must be raised on the manual template.]
  • PCT, related trusts and additions are cumulated for rate as usual.

The calculation under S71G Where a S71E charge arises due to a disposition that reduces the value of the trust property, it is at the flat rate under S70, as amended by S71G (IHTM42802).

The value of the disposition should be grossed if appropriate.

  • The relevant period begins with the day on which S71D began to apply to the settled property.
  • But if the trust was previously an Accumulation & Maintenance trust (IHTM42807) to which S71 applied, the relevant period begins with the day on which S71 began to apply to the settled property.