Qualifying Interests In Possession: Restating The Problem (Video)

• Published date: 24 September 2021
• Subject Matter: Corporate/Commercial Law, Tax, Inheritance Tax, Income Tax, Capital Gains Tax, Trusts
• Law Firm: Wilberforce Chambers
• Author: Jamie Holmes

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Is it possible to taint an interest in possession, thereby losing its transitional protection under the Finance Act 2006 and triggering adverse inheritance tax consequences? Can this be done by merely restating the interest without a change of beneficiary? This article explores these questions in light of the recent case of Ware v. Ware [2021] EWHC 694 (Ch).

A. Summary of the statutory regime

Where assets are held subject to a trust, the starting point in determining whether inheritance tax ("IHT") is payable is to ask whether at least one beneficiary has a qualifying interest in possession ("QIIP") in the settled property. If there is at least one such beneficiary then the property settled under the trust in which the beneficiary has a QIIP will at least generally be treated for IHT purposes as forming part of that beneficiary's estate, to be taxed upon their death or on termination of their interest during their lifetime.

If and to the extent that there is no beneficiary with a QIIP then (again generally) a number of IHT charges will be applied to the trust under "the 'relevant property' regime". The applicable charges include (i) a charge payable every 10-years over the life of the trust, (ii) an 'exit' charge whenever capital is distributed, and (iii), most notably, a 20% 'entry' charge whenever assets are made subject to the trust.

Following amendments introduced by the Finance Act 2006 ("the FA 06"), there are broadly (for IHT purposes) four groups of interest in possession that qualify as a QIIP under the Inheritance Tax Act 1984 ("the IHTA"), Sections 59, 49 and as follows:

First, a saving provision was effectively included for any interest in possession to which a beneficiary had become entitled prior to 22 March 2006.

Second, three further sets of transitional provisions were also included across the IHTA, Sections 49B-E for interests in possession that arose before 22 March 2006 and passed thereafter in the period before, to and/or after 6 October 2008 ('transitional serial interests'; the conditions for each are different).

Third, the new regime does not apply to an interest in possession for the benefit of a 'disabled person' as defined in the IHTA, s89B-89C (and see the Finance Act 2005, Schedule 1A for the definition of 'disabled person') (a 'disabled person's interest').

Fourth, the regime does not apply to an interest that arises as a result of a will or intestacy, to which the beneficiary became entitled upon the death of the...