Revenue Note for Guidance

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Revenue Note for Guidance

15 Acquisitions by discretionary trusts

Summary

This section provides that where property is or becomes subject to a discretionary trust on or after 25 January 1984, the trust will be deemed to have taken an inheritance accordingly, which is chargeable at the rate of 6%. This once-off charge for tax will not arise until—

  • the disponer is dead, and
  • none of the principal objects (see section 14) of the trust, if any, is under the age of 21 years (25 years where the property became subject to the discretionary trust on or after 25 January 1984 and before 31 January 1993).

Where there are no principal objects of the trust, the charge will arise when the disponer dies if the property in the trust is held on a discretionary trust as defined in section 2(1).

All the provisions of the Act will apply except where restricted by section 16.

Details

(1) Where property becomes subject to a discretionary trust on or after 25 January 1984, the trust will be deemed, on the latest of 3 dates, to have become beneficially entitled in possession to an absolute interest in the property comprised in the trust on that latest date and to have taken an inheritance as if the trust and the trustees were together a person and the latest date is the date of the inheritance. The 3 dates are:

  • the date on which the property becomes or became subject to the discretionary trust;
  • the date of death of the disponer; or
  • where there are principal objects of the trust, the date on which there ceases to be a principal object of the trust who is under the age of 21 years (25 years where the property became subject to the discretionary trust on or after 25 January 1984 and before 31 January 1993).

(1A) For the purposes of section 15 and section 20, where a discretionary trust is created under the will (including under a codicil to that will) of a deceased person property shall be deemed to be subject to the trust on the date of death of that person.

(2), (3) Property which was subject to a discretionary trust on 25 January 1984 or on 31 January 1993 is deemed to have become subject to the trust on those dates. The first date referred to is the date when the charge originally applied. Where property became subject to a discretionary trust on or after 31 January 1993, the age requirement of a principal object was reduced from 25 years to 21 years.

(4)(a) An interest in expectancy is not property until an event happens whereby the interest ceases to be an interest in expectancy, or is represented by property which is not an interest in expectancy e.g. the proceeds of sale of a future interest.

(4)(b) An interest in a life assurance policy is not property until the interest becomes an interest in possession under section 41 or is represented by property which is not an interest in possession.

(5) While it is intended that property in a discretionary trust should be charged with inheritance tax on one occasion only, it may happen that the same property in the same discretionary trust may be chargeable with tax more than once. For example, a person died in 1990 leaving his/her residuary estate to trustees on discretionary trusts for his/her nephews and nieces. In 1995, the trustees appointed a life interest in the trust property to a niece for life. The niece died in 2003. Under subsection (1), a further claim for tax would arise in 2003 when the niece dies and the property becomes subject to the discretionary trust. Subsection (5) ensures that only one charge for tax will arise i.e. the charge arising in 1990.

Relevant Date: Finance Act 2015