Interest in Possession Trust Inheritance Tax UK: IPDI, Life Interest, and How They Are Taxed (2026)
An interest in possession trust puts the trust property into the life tenant's IHT estate — no periodic or exit charges. The IPDI (will trust for a surviving spouse) combines the spousal exemption on first death and RNRB preservation on second death: the right trust type can save up to £140,000 more IHT than a discretionary trust.
| Feature | IPDI / IP Trust | Discretionary Trust | Bare Trust |
|---|---|---|---|
| IHT treatment | In life tenant's estate (s49(1) IHTA 1984) — aggregated on death | NOT in any individual's estate — relevant property regime (s58 IHTA 1984) | In beneficiary's estate — treated as directly owned |
| IHT on life tenant's/beneficiary's death | 40% above NRB on life tenant's personal estate + trust assets combined | No IHT on life tenant's death (trust not in estate) | 40% above NRB on beneficiary's estate including bare trust assets |
| Periodic charge (s64 IHTA) | NONE — not relevant property | Up to 6% every 10 years on trust fund above NRB | NONE |
| Exit charge (s65 IHTA) | NONE | Fraction of periodic rate × quarters elapsed / 40 | NONE |
| RNRB on residential property | PRESERVED — s8H IHTA 1984: RNRB applies on life tenant's death if remainder to direct descendants | LOST — discretionary trust is not a qualifying residential interest for RNRB | PRESERVED — beneficiary directly owns the property; RNRB applies if direct descendant |
| CGT on termination of interest | Death of life tenant: s73 TCGA — trust assets uplifted to market value; no CGT on accrued gain | Appointments to beneficiaries may trigger CGT (though hold-over available — s260 TCGA) | No CGT on creation; beneficiary taxed on disposal |
| Created by will (immediate effect) | YES — IPDI under s49A IHTA 1984; spousal exemption (s18 IHTA) where surviving spouse is life tenant | YES — will trust; entry charge avoided (no CLT on death) | YES — but usually used for specific assets; beneficiary owns beneficially |
| Created inter vivos (lifetime trust) | Post-22 March 2006: enters relevant property regime UNLESS disabled person/TSI | CLT (entry charge at 20% above NRB); periodic/exit charges | PET by settlor (7yr clock); beneficiary owns beneficially from outset |
IPDI: Immediate Post-Death Interest — s49A IHTA 1984; life interest from will taking effect immediately on death. IP trust IHT: s49(1) IHTA 1984 — qualifying interest in possession = property in life tenant's estate. Relevant property regime: s58 IHTA 1984 — discretionary trusts; periodic charge s64 IHTA (up to 6%/10yr); exit charge s65 IHTA. RNRB: s8D IHTA 1984 (£175k frozen to 2030); RNRB on IPDI termination: s8H IHTA 1984. Spousal exemption: s18 IHTA 1984 — IPDI for surviving spouse qualifies. Pre-22 March 2006 IP trusts: preserved as qualifying IP trusts. Post-22 March 2006 lifetime IP trusts: relevant property regime (periodic/exit charges) unless s89 IHTA disabled person's trust or TSI. CGT: death of life tenant = uplift s73 TCGA 1992; no CGT on accrued gain. Bare trust: PET (s3A IHTA 1984); beneficiary owns beneficially; no periodic/exit. NRB: £325k (frozen to 2030). Discretionary trust RNRB loss: up to £70k/person; £140k/couple.
Interest in Possession Trust IHT: Complete Guide
What is an interest in possession trust?
An interest in possession (IP) trust is a trust in which one beneficiary (the 'life tenant') has an immediate right to the income produced by the trust assets — or the right to occupy trust property (e.g. the family home). The life tenant does NOT own the trust capital; they can only receive income from it. The capital belongs to the 'remaindermen' (usually children) who receive it when the life interest ends — typically on the life tenant's death. The critical IHT rule: the trust property IS treated as part of the life tenant's IHT estate under s49(1) IHTA 1984 ('settled property' in which the person has a 'qualifying interest in possession'). This means: (1) the trust assets are aggregated with the life tenant's personal estate on death; (2) IHT is charged at 40% on the combined estate above the NRB; (3) there are NO periodic or exit charges on an IP trust (unlike a discretionary trust which has a 6% periodic charge every 10 years). There are two main forms of IP trust in IHT: (a) the IPDI (Immediate Post-Death Interest — s49A IHTA 1984) — created by a will and taking effect immediately on the testator's death; (b) pre-22 March 2006 IP trusts — all IP trusts created before that date are treated as qualifying IP trusts under the old rules. Post-22 March 2006 lifetime IP trusts (inter vivos) are generally treated as relevant property (discretionary) trusts — unless they qualify as a 'disabled person's interest' (s89 IHTA 1984) or a 'transitional serial interest' (TSI).
The IPDI — the modern will trust for spouses
The Immediate Post-Death Interest (IPDI — s49A IHTA 1984) is the most practically important IP trust in estate planning. An IPDI arises where: (1) the trust is created by will or intestacy; (2) it takes effect immediately on the testator's death (no gap, no intervening discretionary period); (3) the life tenant becomes entitled to the income immediately. The IPDI is used primarily where a testator wants to protect a surviving spouse's right to income and/or occupation of the family home, while ensuring the capital ultimately passes to children. IHT treatment of an IPDI: On first death (testator's death): the property enters the IPDI trust; the surviving spouse is the life tenant; the spousal exemption (s18 IHTA 1984) applies to the property transferred to the IPDI (because the spouse is the qualifying life tenant — the property is treated as passing to the spouse). Result: no IHT on first death. On second death (life tenant's death): the IPDI trust property is in the life tenant's (surviving spouse's) estate — aggregated with their personal estate; taxed at 40% above the threshold; RNRB applies (s8H IHTA 1984) if the remainder (the family home) passes to direct descendants. The IPDI is thus the vehicle that combines: the spousal exemption on first death; the RNRB on second death; AND protection of the surviving spouse's right to live in the home for life (the trustees cannot remove the spouse from the home during their lifetime). It outperforms both the outright bequest to spouse (no protection for children's inheritance if spouse remarries) and the discretionary trust (RNRB lost).
RNRB preservation with an IPDI — the key advantage over discretionary trusts
The RNRB (s8D IHTA 1984) is available where a 'qualifying residential interest' passes to a 'direct descendant' (s8K IHTA 1984). For a property held in an IPDI trust: the RNRB applies on the life tenant's death (s8H IHTA 1984) — not as a standard transfer to a direct descendant, but via a special provision that preserves the RNRB when the IPDI terminates (on the life tenant's death) and the trust property passes to the direct descendants (the remaindermen). This is critical: a discretionary trust holding the family home does NOT qualify for the RNRB (even if the sole beneficiaries of the discretionary trust are the children). The RNRB is ONLY available where the property passes to a direct descendant (or via an IPDI with remainder to direct descendants, or via a disabled person's trust, or directly). The cost of using a discretionary trust for the home vs an IPDI: up to £70,000 per person (40% × £175,000 RNRB) or £140,000 for a couple — avoidable IHT created by the wrong trust type. Many pre-2017 wills included NRB discretionary trusts over the property on first death: these were drafted before the RNRB existed; the NRB trust now costs £70,000 in lost RNRB per trust. Wills with NRB discretionary trusts for the home should be reviewed and updated to use IPDI trusts instead. The RNRB preservation under s8H IHTA also applies to transitional serial interests (TSIs) and to disabled person's interests under s89B IHTA.
Pre-22 March 2006 IP trusts — the old rules preserved
On 22 March 2006, the Finance Act 2006 fundamentally reformed the IHT treatment of trusts. Before that date: ALL interest in possession trusts (whether created by will or lifetime settlement) were treated as 'qualifying' IP trusts — the trust property was in the life tenant's estate (s49(1) IHTA 1984); no periodic or exit charges. After 22 March 2006: new LIFETIME IP trusts (inter vivos) generally entered the relevant property (discretionary) regime — periodic charges every 10 years; exit charges. The transitional protection: IP trusts that EXISTED on 22 March 2006 retained their old-style IP treatment permanently. An IP trust created before 22 March 2006 and still in existence today: the trust property is still in the life tenant's estate; no periodic or exit charges; treated exactly as under the pre-2006 rules. The life tenant can change (TSI — transitional serial interest) but the trust must have existed at the key date. What does NOT retain old-style treatment: a NEW lifetime IP trust created after 22 March 2006 (e.g. in a deed of settlement created in 2010) — this is in the relevant property regime regardless of whether the settlor intended it to be an IP trust. Post-22 March 2006 WILL trusts (IPDI): these do qualify as IP trusts (under the new IPDI rules) — the date of the will is irrelevant; what matters is that the trust was created by the death (which occurs after 22 March 2006) and the IPDI conditions are met.
CGT treatment of interest in possession trusts
CGT on IP trusts operates differently from IHT, and the interaction matters: (1) Death of the life tenant: under s73 TCGA 1992, on the death of the person with a qualifying interest in possession, the trustees are treated as if they had acquired the trust assets at market value on the date of death — a CGT 'uplift'. Any CGT gain accrued during the life tenancy is extinguished; no CGT is payable on death. The remaindermen inherit the trust assets with a market-value base cost. This is the same 'death uplift' as applies to personally owned assets under s62 TCGA 1992. (2) Lifetime termination (life tenant surrendering the life interest): if the life tenant surrenders their life interest during their lifetime (e.g. to allow the trust to be wound up and assets distributed to the remaindermen), the trustees may have a CGT liability on any gain accrued to that point — holdover relief under s260 TCGA 1992 may be available (because a lifetime surrender of a qualifying IP trust is treated as a CLT for IHT purposes, and s260 holdover is available on CLTs). Professional advice is needed on the CGT treatment of lifetime IP trust terminations. (3) Trust CGT annual exempt amount: trusts have a CGT annual exempt amount of £1,500 (2026/27 — half the individual amount of £3,000). For income arising within the trust: trust income is taxed at the trust income tax rate (45% for income above the trust rate band; £1,000 standard rate band); the life tenant receives a tax credit for tax paid by the trustees.
Frequently Asked Questions
What is an interest in possession trust for IHT purposes?
An interest in possession (IP) trust is a trust in which the life tenant has the right to income from the trust assets (or the right to occupy trust property) immediately. Under s49(1) IHTA 1984, the trust property IS treated as part of the life tenant's IHT estate — aggregated with their personal estate on death and taxed at 40% above the NRB. There are no periodic or exit charges on an IP trust. The most common modern form is the IPDI (Immediate Post-Death Interest — s49A IHTA 1984): a will trust giving the surviving spouse a life interest, with the remainder to the children. The IPDI enables the spousal exemption on first death (s18 IHTA) and the RNRB on second death (s8H IHTA) when the remainder passes to the children.
Does an interest in possession trust have periodic or exit charges?
No — an interest in possession trust that qualifies as a 'qualifying interest in possession' under s49 IHTA 1984 is NOT subject to the periodic charge (s64 IHTA) or exit charge (s65 IHTA). These charges (up to 6% every 10 years; exit charge on capital distributions) apply only to 'relevant property' trusts — i.e. discretionary trusts. An IPDI (will trust for a surviving spouse) is an IP trust and has no periodic or exit charges. The property is simply in the life tenant's estate and taxed on their death. The key distinction: IP trust = in life tenant's estate (no periodic/exit charges); discretionary trust = not in any estate (periodic/exit charges apply).
Does the RNRB apply to property held in an IPDI trust?
Yes — the RNRB is preserved for property held in an IPDI trust under s8H IHTA 1984. When the IPDI terminates on the life tenant's death and the family home passes to direct descendants (the remaindermen — e.g. children), the RNRB (£175,000 per person, £350,000 combined for a couple using transferred RNRBs) applies to the home. This is in contrast to a discretionary trust holding the family home — where the RNRB is LOST entirely. The RNRB preservation under s8H IHTA applies automatically: no special election is needed. The executors claim the RNRB in the IHT400 for the second estate, noting the IPDI termination and the property passing to the direct descendants.
What is the difference between an IPDI and a discretionary trust for IHT?
The key differences: (1) IHT on death: IPDI — property in life tenant's estate; taxed on death. Discretionary trust — not in any individual's estate; no IHT on beneficiary's death from the trust itself (periodic charges apply every 10yr instead). (2) RNRB: IPDI — RNRB preserved if home in IPDI passes to direct descendants (s8H IHTA 1984). Discretionary trust — RNRB LOST on the home in the trust (up to £70k extra IHT per person; £140k per couple). (3) Periodic/exit charges: IPDI — NONE. Discretionary trust — up to 6% every 10yr (s64 IHTA 1984); exit charge (s65 IHTA 1984). (4) Spousal exemption: IPDI — s18 IHTA applies on first death (surviving spouse is life tenant). Discretionary trust — s18 exempt if solely for benefit of surviving spouse on first death, but RNRB consequences on second death differ. Conclusion: for a surviving spouse with a home and direct descendant beneficiaries, the IPDI almost always outperforms the discretionary trust.
Can a will trust created before 22 March 2006 still be an IPDI?
If the will was written before 22 March 2006 but death occurred AFTER 22 March 2006: the trust is created on death (not on the date the will was written), so the post-2006 rules apply. The trust qualifies as an IPDI (s49A IHTA 1984) if the conditions are met — life interest takes effect immediately on death; created by will. The date of the will is irrelevant; the date of death determines which rules apply. If death occurred BEFORE 22 March 2006: the trust is a pre-2006 IP trust and retains old-style treatment permanently (property in life tenant's estate; no periodic/exit charges — but no RNRB either, as RNRB didn't exist until April 2017). Practical point: a will written in 2000 using an NRB discretionary trust structure — if the testator is still living — should be reviewed and possibly rewritten using an IPDI structure to secure the RNRB for the surviving spouse.
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