Contingent Interests and IHT: When a 'Trust Until 25' Triggers 10-Year Charges
A trust where a beneficiary's entitlement depends on a future condition — reaching age 25, for example — falls within the relevant property regime for IHT. The trust pays a periodic charge every 10 years and an exit charge when property leaves the trust. Unlike a bereaved minors trust (which is IHT-free), a contingent trust beyond age 18 carries an IHT cost.
Types of Trust Interest and IHT Treatment
Vested interest in possession (IIP)
A beneficiary has an interest in possession where they are currently entitled to the income of the trust as it arises (or entitled to use and enjoy the trust property). An IIP is a vested right — the beneficiary's entitlement does not depend on a future event. For IHT: where the beneficiary acquired the IIP on or after 22 March 2006 (other than an IPDI, disabled persons trust, or transitional serial interest), the IIP falls within the relevant property regime — the trust property is not treated as belonging to the life tenant for IHT and is subject to periodic/exit charges. Pre-22 March 2006 IIPs (and IPDIs, disabled persons trusts) are treated as belonging to the life tenant for IHT.
Vested future interest (right to capital or income on a future date, without condition)
A beneficiary may have a vested future interest — for example, a right to capital on attaining 18 (where the trust deed gives absolute entitlement at 18, with no condition other than survival). If the beneficiary is under 18, they are absolutely entitled to the capital but cannot call for it yet. Such a trust (where the only 'condition' is attaining the vesting age) is typically a bare trust — the beneficiary is absolutely entitled and the trustee holds as nominee. A bare trust is not within the relevant property regime: no periodic or exit charges. The trust property is treated as belonging to the beneficiary for IHT.
Contingent interest (entitlement depends on a future event)
A contingent interest is a right to trust property that depends on a condition being satisfied — typically attaining a specified age above 18 (such as 25), or surviving a specified date. If the condition is not satisfied (the beneficiary dies before attaining the age, or the date passes without the event occurring), the right lapses. A contingent interest is fundamentally different from a vested interest for IHT: the contingent beneficiary has no current entitlement and the trust property does not belong to them for IHT. Unless the trust falls within an exempted category (bereaved minors trust — s71A; 18-to-25 trust — s71D; disabled persons trust — s89), the trust with contingent interests falls within the relevant property regime: 10-year periodic charges and exit charges apply.
Accumulation and maintenance trust (pre-FA 2006 legacy trusts)
Before Finance Act 2006, accumulation and maintenance trusts (A&M trusts) meeting s71 IHTA 1984 conditions were exempt from the relevant property regime — no 10-year charges or exit charges. After FA 2006, A&M trusts meeting the conditions became either: (1) a bereaved minors trust under s71A (if the conditions are met exactly); (2) an 18-to-25 trust under s71D (if capital is payable by 25); or (3) relevant property trusts (if neither condition is met). Pre-existing A&M trusts that did not satisfy the post-2006 conditions have been taxed as relevant property trusts since 6 April 2008 (when the transitional period ended). Many family trusts created before 2006 with capital payable at 25 or later are now relevant property trusts — with periodic charges that may have arisen at 10-year anniversaries after 2008.
Frequently Asked Questions
What is the difference between a contingent interest and an interest in possession for IHT?
The key distinction is whether the beneficiary has a current entitlement: (1) Interest in possession (IIP): the beneficiary is presently entitled to the income of the trust or to occupy the trust property — their right is vested and immediate. Under pre-2006 and specific post-2006 rules (IPDI, disabled persons trust), the IIP beneficiary is treated as owning the trust property for IHT. (2) Contingent interest: the beneficiary's right to the trust property depends on a future condition — typically attaining a specified age. Until the condition is met, the beneficiary has no current entitlement. The contingent interest is not treated as the beneficiary's property for IHT — the trust is within the relevant property regime, subject to periodic and exit charges. This distinction matters enormously for IHT planning: a trust for 'X at 25' may face 10-year charges; a trust for 'X for life, then Y at 25' may have IHT on the life tenant's interest and further charges when the contingent remainder falls in.
When does the 10-year periodic charge arise on a trust with contingent interests?
Where a trust is within the relevant property regime (because it holds contingent interests that do not fall within the bereaved minors, 18-to-25, or disabled persons trust exemptions), a 10-year periodic charge arises on each 10-year anniversary of the creation of the trust. The rate: 6% of the value of relevant property in the trust above the NRB (applying the NRB at the date of the charge and deducting any prior chargeable transfers by the settlor in the 7 years before the trust was created). For contingent trusts where the trustees have accumulated income rather than distributed it, the relevant property includes accumulated income if income has been added to capital. The trustees are responsible for reporting and paying the periodic charge — failure to do so attracts interest and potentially penalties.
What is an exit charge for a trust with contingent interests?
An exit charge (also called an 'exit event') arises when property leaves the relevant property regime — typically when: (1) a contingent interest vests (the beneficiary reaches the specified age) and the trustees appoint capital to them absolutely; (2) the trustees exercise a power of advancement to pay capital to a contingent beneficiary before the vesting date; (3) the trustees distribute capital to an object of the trust's discretionary class. The rate of the exit charge is a fraction of the periodic charge rate (based on the fraction of the 10-year period that has elapsed since the last 10-year anniversary). Exit charges are typically much lower than periodic charges — especially in the early years of a trust. Planning: trustees sometimes make capital distributions (advances) to contingent beneficiaries in the years immediately after a 10-year anniversary when the exit charge rate is low.
Does a bereaved minors trust avoid the relevant property regime?
Yes — a bereaved minors trust under s71A IHTA 1984 is exempt from the relevant property regime: no 10-year periodic charges and no exit charges. For the exemption to apply: (1) the trust must be set up under the will (or intestacy) of a deceased parent; (2) the beneficiary must be a child of the deceased; (3) the trust must give the beneficiary an absolute entitlement to both income and capital by age 18; (4) no person other than the beneficiary can benefit from the trust while the beneficiary is living and under 18. These conditions are strict — a trust for a grandchild, or a trust where capital is payable at 21 (not 18), does not qualify as a bereaved minors trust. The 18-to-25 trust (s71D) extends the vesting age to 25 but imposes a tapered exit charge (max 4.2%) when capital is paid at ages 18-25.
What happens for IHT if a contingent beneficiary dies before their interest vests?
If a contingent beneficiary dies before satisfying the condition (e.g. dies before reaching age 25), their interest lapses — they never owned the trust property for IHT purposes. The trust fund remains in the relevant property regime, with the remaining beneficiaries or discretionary class taking over. On the contingent beneficiary's death: (1) the trust property is not part of their estate for IHT (they had no entitlement); (2) the trust continues, still subject to periodic and exit charges; (3) if the trust deed provides for the fund to pass to other contingent beneficiaries on the first beneficiary's death, the new beneficiaries' contingent interests take effect. No IHT on the dead beneficiary's estate from the trust — but the trust itself continues to be charged at 10-year intervals.
Can a contingent trust be converted into a bare trust to escape the relevant property regime?
If the trustees have power to advance or appoint capital to a beneficiary absolutely before the vesting date, they can convert a contingent interest into a vested (bare trust) interest — bringing the trust property into the beneficiary's estate for IHT (and outside the relevant property regime). This is an exit event: the exit charge applies to the proportion of the trust fund advanced. However, if the beneficiary is absolutely entitled after the advance, the property is treated as theirs for all subsequent IHT — included in their estate on death. This strategy trades the ongoing periodic charge risk for the beneficiary including the property in their estate — which may or may not be beneficial depending on the beneficiary's IHT position. Trustees should take specialist advice before exercising advancement powers with IHT in mind.
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