Advanced Taxation (UK) · Inheritance tax: transfers to and from trusts and property within trusts

Interest in Possession Trusts and Transfers from Trusts for IHT

Updated 11 October 2026 · Fact-checked

For inheritance tax, a life tenant with a qualifying interest in possession is treated as owning the trust assets. There are no periodic or exit charges. When the interest ends on death, the fund is added to the estate and taxed at 40% above the nil rate band. A lifetime ending is a PET or CLT.

Understand Interest in Possession Trusts and Transfers from Trusts

A trust has a life tenant, who is entitled to the income, and remaindermen, who get the capital later. If the life tenant has a qualifying interest in possession, IHT treats them as if they own the underlying assets. The trust is not a separate taxpayer for IHT. This is the opposite of the relevant property regime, where the trust is taxed itself.

The qualifying interests you need are:

Immediate post-death interest (IPDI): created by a will or intestacy, with the beneficiary entitled immediately on death. This is the most common one.
Interests in force before 22 March 2006: these keep qualifying status.
Disabled person's interests, including transitional serious disability interests.

Because the life tenant is deemed to own the fund, three things follow. First, the trust is outside the periodic charge and exit charge regime. Second, creating an IPDI on death is not a new transfer by the life tenant. If it passes to the deceased's spouse, the spouse exemption applies. Third, the fund is taxed when the interest ends.

When the life tenant dies, the fund is added to their free estate. The tax on the whole estate is computed using the nil rate band, and that tax is then apportioned between the free estate and the settled property by value. Tax is charged at the death rate of 40%. The trustees pay the tax on the trust part. Reliefs such as business or agricultural property relief, or spouse exemption if the fund then passes to the life tenant's spouse, can reduce it.

If the interest ends in the lifetime, the result depends on where the property goes. If it passes to an individual absolutely, to a disabled person's trust, or to a qualifying bereaved minor trust (see below), it is a PET. If it passes into a relevant property trust, it is a chargeable lifetime transfer. If it passes to the tenant's spouse, it is exempt.

A bereaved minor trust normally arises on a parent's death, under the parent's will or intestacy, for a child under 18, and the child must become absolutely entitled at 18. It sits outside the relevant property regime: no periodic charges, and no exit charge if capital goes to the child at 18 or the child dies before 18. There is one lifetime route. If an IPDI ends in the life tenant's lifetime and the property passes to a trust for a bereaved minor child of the deceased that meets the bereaved minor trust conditions, the ending is a PET, not a CLT.

An 18 to 25 trust is a separate regime. It is also set up for a child of a deceased parent, but the child becomes entitled at an age between 18 and 25. It is a relevant property trust with special rules. There is no periodic charge, and no exit charge on capital leaving before the child's 18th birthday. On capital leaving after the 18th birthday, an exit charge applies. It is based on the number of complete quarters since that birthday.

Key rules to remember

Deemed ownership: Life tenant with qualifying IIP = deemed owner of the trust fund; No periodic or exit charges on the trust. The fund is part of the life tenant's estate for IHT.
Tax on fund at life tenant's death: IHT on the whole estate (free estate + fund) at 40% above the available nil rate band of £325,000 (less earlier transfers in the previous 7 years); The tax on the whole estate is then apportioned between the free estate and the fund by value. Residence nil rate band of £175,000 may apply if its conditions are met. Check the tables.
Trustees' share of tax: Tax on fund = total estate tax × fund ÷ total estate; The trustees pay the share of tax relating to the trust assets. The personal representatives pay the rest.
Lifetime termination: Absolute entitlement to an individual, or to a disabled person's trust, or to a qualifying bereaved minor trust (IPDI ending in lifetime) = PET. Into a relevant property trust = CLT. To spouse = exempt.; A PET becomes chargeable if the life tenant dies within 7 years. Taper relief is in the tax tables: 20% reduction after 3 years, 40% after 4, 60% after 5, 80% after 6.
Bereaved minor trust: Parent's death, child under 18, absolute entitlement at 18 = no periodic charge, no exit charge; It normally arises on a parent's death. An IPDI ending in the life tenant's lifetime in favour of a qualifying bereaved minor trust is a PET. If entitlement is set for an age after 18, it is not a bereaved minor trust.
18 to 25 trust: Parent's death, child entitled at an age between 18 and 25 = no periodic charge, exit charge only on capital leaving after the 18th birthday; The exit charge is based on the complete quarters since the child's 18th birthday. This is a separate regime from the bereaved minor trust.

How to solve Interest in Possession Trusts and Transfers from Trusts questions

Use this order for any question about an interest in possession trust or a transfer out of one.

1Identify the type of trust. Ask whether the life tenant's interest is qualifying: IPDI, pre-22 March 2006, or disabled person's interest. If not, move to the relevant property regime.
2Say who is treated as owning the fund. For a qualifying interest, the life tenant is deemed to own it. State that there are no periodic or exit charges.
3Identify the event: death of the life tenant, or termination in the lifetime. Give the date.
4On death, add the fund to the free estate. Apply spouse, charity and business or agricultural reliefs where the conditions are met. Deduct any nil rate band left after earlier transfers in the previous 7 years.
5Compute tax at 40% on the excess over the nil rate band. Split it between the free estate and the fund in proportion to value, and say the trustees pay the trust share.
6On a lifetime termination, classify it as exempt, a PET or a CLT depending on the recipient. Consider the annual exemption and the death within 7 years consequences, using the taper relief table.
7For a bereaved minor trust or an 18 to 25 trust, check the child's age and when entitlement arises. Explain whether an exit charge applies.
8Finish with practical points: who pays, due dates and CGT effects (uplift on death, possible gift relief on lifetime termination).

Quickest way: Fast routine for exam time

When to use it: Use when the scenario gives a life tenant, a fund value and an event, and asks for the IHT consequence.

Write one line: qualifying IIP, so fund is part of life tenant's estate.
Write the event and the date.
If death: total = free estate + fund. Subtract available nil rate band. Multiply by 40%.
Allocate tax by value: fund ÷ total estate × tax.
If lifetime: write exempt, PET or CLT and note the 7 year rule.
Add one sentence on CGT, such as uplift on death.

Common mistakes in Interest in Possession Trusts and Transfers from Trusts

Charging a periodic or exit charge on an IPDI trust.
Students link all trusts with the 10 year charge.
Fix: Check the interest is qualifying first. A qualifying IIP is treated as the life tenant's own property, so there is no periodic or exit charge.
Treating creation of an IPDI as a transfer by the settlor in lifetime.
Confusing a will trust with a lifetime settlement.
Fix: An IPDI is created on death. It is part of the deceased's estate on death, and spouse exemption applies if the tenant is the spouse.
Leaving the fund out of the life tenant's death estate, or giving it its own nil rate band.
Students treat the trust as a separate person.
Fix: Add the fund to the free estate. Compute the tax on the whole estate using one nil rate band, then apportion the tax between the free estate and the fund by value.
Treating a lifetime ending of the interest as always a CLT.
Students remember that gifts into trusts are CLTs.
Fix: Look at where the property goes. Absolute entitlement of an individual is a PET. Only going into a relevant property trust is a CLT.
Applying the bereaved minor trust rules when the child is entitled later than 18, or when the trust does not arise on a parent's death.
Students mix up the bereaved minor trust with the 18 to 25 trust.
Fix: A bereaved minor trust needs a parent's death, a child under 18 and absolute entitlement at 18. If entitlement comes between 18 and 25, treat it as an 18 to 25 trust with its own exit charge. If neither set of conditions is met, it is a relevant property trust.
Allocating all the tax to the personal representatives.
Forgetting that trustees are liable for the trust share.
Fix: Split tax by value between the free estate and the fund, and state that the trustees pay the fund's share.

Worked examples

Example 1

Maya died in October 2026. Her free estate of £400,000 passes to her children. She was also life tenant under an IPDI in a fund worth £200,000 created by her late husband's will. On her death the fund passes to her children. She made no lifetime transfers. Assume the residence nil rate band does not apply and no other reliefs are available. Compute the IHT and say who pays it.

Show the solution

Maya had a qualifying IPDI, so the fund is treated as part of her estate.
Total chargeable estate = £400,000 + £200,000 = £600,000.
Nil rate band available = £325,000 (no earlier transfers).
Taxable amount = £600,000 − £325,000 = £275,000.
IHT at the death rate of 40% = £110,000.
Trust share = £110,000 × £200,000 ÷ £600,000 = £36,667 (rounded).
Free estate share = £110,000 − £36,667 = £73,333.

Answer: Total IHT is £110,000. The trustees pay about £36,667 on the fund. The personal representatives pay about £73,333 on the free estate.

Example 2

Ben is life tenant under an IPDI in a fund of £500,000. On 1 March 2026 he gives up his interest and the fund passes to his daughter absolutely. He made no other transfers and dies on 1 September 2027, leaving a death estate of £100,000. Ignore the annual exemption and the residence nil rate band. Show the IHT consequences.

Show the solution

Ben is treated as owning the fund, so giving up his interest is a transfer of value by him.
The fund passes to an individual absolutely, so it is a PET.
Ben dies within 7 years, about 18 months later, so the PET becomes chargeable.
The nil rate band of £325,000 is used first against the PET.
Taxable amount = £500,000 − £325,000 = £175,000.
Death rate of 40% applies. Taper relief is not available as death is within 3 years. Tax = £175,000 × 40% = £70,000, paid by the daughter.
The nil rate band is fully used, so the death estate of £100,000 is taxed at 40% = £40,000.

Answer: The PET becomes chargeable with IHT of £70,000, payable by the daughter. The death estate suffers IHT of £40,000.

Exam tips

State in your first sentence whether the interest is qualifying and why. This earns the marks for the classification and sets up the rest of your answer.
Always give the exact event date and age. Questions often hinge on dates, such as the 18th birthday, 25th birthday or the 7 year window.
Show the tax split between trustees and personal representatives. Many students stop at the total.
Use the nil rate band, rates and taper relief from the tax tables ACCA provides. Do not rely on memory for figures.
Add a sentence on CGT and cash flow. Professional skills marks reward clear advice that goes beyond the single tax asked.

Practice questions from Inheritance tax: transfers to and from trusts and property within trusts

Interest in Possession Trusts and Transfers from Trusts: frequently asked questions

What is an immediate post-death interest?

It is an interest in possession created by a will or on intestacy, where the beneficiary is entitled to the income immediately on death. It is a qualifying interest. The life tenant is treated as owning the trust assets for IHT.

What happens to an interest in possession trust when the life tenant dies?

The fund is added to the life tenant's estate, on top of the free estate. IHT is charged at 40% above the available nil rate band. The trustees pay the tax on the fund, and the personal representatives pay the rest.

How is a bereaved minor trust taxed for IHT?

It normally arises on a parent's death for a child under 18 who becomes entitled at 18. It is outside the relevant property regime, so there are no periodic charges. There is no exit charge if the child takes the capital at 18.

How are trust assets taxed when an interest in possession ends in the lifetime?

The life tenant is treated as making a transfer of value. It is a PET if the property goes to an individual absolutely, to a disabled person's trust, or to a qualifying bereaved minor trust where an IPDI ends. It is a CLT if it goes into a relevant property trust, and exempt if it goes to the spouse.