Interest in Possession Trusts and IHT UK 2026: s49 IHTA, Pre/Post FA 2006 Rules, Immediate Post-Death Interests, Transitional Serial Interests, and the Life Tenant's Estate
Finance Act 2006 split IIP trusts into two worlds: qualifying trusts (IPDI, disabled person, TSI) where the life tenant is treated as owning the trust fund; and post-FA 2006 lifetime IIP trusts treated as relevant property with 10-year charges. Which world does your trust live in?
FA 2006 Changed Everything — New Lifetime IIP Trusts Are Relevant Property (10-yr Charges)
A will-based IPDI trust (s49A IHTA) retains the pre-FA 2006 s49 treatment: life tenant treated as owning the fund; no 10-yr charges. A NEW lifetime IIP trust (created after 22 March 2006) is relevant property: 20% entry charge; 10-yr periodic charge; exit charges. For surviving spouse trust planning: always use a will-based IPDI trust — never a lifetime IIP settlement.
| Trust Type | s49 Treatment? | Post-FA 2006 Position | Planning Guidance |
|---|---|---|---|
| Pre-22 March 2006 IIP trust — s49 treatment | ALL interest in possession trusts created before 22 March 2006 benefit from s49(1) IHTA treatment: the IIP beneficiary (life tenant) is treated as owning the trust assets for IHT — the trust fund is in their estate. When the life tenant dies: IHT is assessed on the trust fund as part of their estate (at their marginal IHT rate, after deducting their available NRB). The fund passes to the remainderman — this is not a CLT or PET by the trust (it is the life tenant's estate settling IHT and distributing to the next beneficiary). The creation of the trust (before 22 March 2006) was a PET (for a gift into an IIP trust by an individual): outside the settlor's estate after 7yr. No 10-yr charges applied during the life of the trust (unlike a discretionary trust). The relevance property regime (ss64-65 IHTA — 10-yr charges, exit charges) did NOT apply to qualifying IIP trusts. | NOT APPLICABLE — this category relates to pre-FA 2006 trusts. The pre-2006 IIP trusts continue to benefit from s49 treatment indefinitely (until the trust terminates or changes to a non-qualifying form). A change of IIP beneficiary in an old qualifying IIP trust MAY break the s49 treatment after FA 2006 — unless the TSI rules apply (ss49B-49D IHTA). If in doubt: seek specialist trust and IHT advice before changing the beneficiary of an old IIP trust. | Old IIP trusts (created before 22 March 2006): are valuable structures. The life tenant has a known IHT position (trust fund in estate). If the trust has accumulated significant value: the life tenant's executors should plan around the potential IHT on their estate including the trust fund. The NRB, RNRB, and any BPR/APR in the trust assets can reduce the IHT on the trust fund at the life tenant's death. The remainderman takes the assets free of further IHT (the IHT was paid on the life tenant's estate). Contrast: a post-FA 2006 relevant property trust pays 10-yr charges indefinitely — it never 'settles' the IHT by taxing the life tenant. |
| Immediate Post-Death Interest (IPDI — s49A IHTA 1984) | An IPDI is an IIP trust that arises IMMEDIATELY on the death of the testator (the person making the will). The IIP beneficiary is entitled to receive the trust income from the date of death. Created by: a will; or intestacy. The IIP beneficiary of an IPDI is treated as owning the trust fund under s49(1) IHTA — the SAME treatment as pre-FA 2006 IIP trusts. The IPDI is NOT relevant property: no 10-yr charges; no exit charges. Most common IPDI: a will leaving the estate 'to my surviving spouse for life, then to my children' — the surviving spouse has an IPDI. The house, investments, and cash held in the IPDI trust are treated as OWNED BY THE SURVIVING SPOUSE for IHT. When the surviving spouse dies: the IPDI trust fund (including the home) is in their estate for IHT. | The IPDI rules apply to ALL wills regardless of when made (the relevant date is the date the trust ARISES — the date of death of the testator). A will made in 2010 with an IIP trust for the surviving spouse: when the testator dies, the IIP trust arises — it is an IPDI (arises immediately on death); s49A applies; s49 treatment. The subsequent change of IIP beneficiary (e.g., the life tenant assigns their interest): may convert the trust to a TSI (if conditions met) or to a relevant property trust (if conditions not met). CRITICAL: before any assignment, surrender, or change of the IIP beneficiary in an IPDI trust: specialist advice is essential. | IPDI trusts and the RNRB: if the IPDI trust holds the family home and the IPDI life tenant (surviving spouse) dies: the question is whether the RNRB (s8D IHTA) applies to the home in the trust. HMRC guidance: the RNRB can apply where a qualifying residential interest is inherited by direct descendants from the 'estate' — and an IPDI trust fund IS in the estate (s49 treatment). The home in the IPDI trust passes to children on the life tenant's death: RNRB potentially applies. Key condition: the home must have been the life tenant's 'residence' at some point. Specialist advice on RNRB and IPDI trusts is essential — the position depends on exact trust terms and whether the home was actually lived in. |
| Transitional Serial Interest (TSI — ss49B-49D IHTA 1984) | A TSI preserves the s49 treatment through a chain of IIP beneficiaries in certain circumstances after FA 2006. Three types: (1) s49B IPDI-to-further-IIP: where an IPDI terminates and the trust property becomes held on a new IIP (rather than on discretionary trusts) — if conditions met. (2) s49C pre-22 March 2006 IIP trust that changes beneficiary: the subsequent IIP beneficiary has a TSI if the trust was already in existence on 22 March 2006 and the change of beneficiary occurs after that date. The subsequent beneficiary is treated as having a TSI — s49 continues. (3) s49D disabled person's TSI. CRITICAL POINT: the TSI rules are complex and have specific conditions — NOT all changes of IIP beneficiary in old trusts automatically create a TSI. If the conditions are NOT met: the trust converts to a relevant property trust and 10-yr charges begin. | TSI loses s49 treatment if: the trust fails one of the TSI conditions; the IIP beneficiary's interest changes to a discretionary interest; the trust is restructured outside the TSI safe harbour. Once a trust becomes relevant property (10-yr charges), it cannot easily revert to the s49/IIP regime. The transition from qualifying IIP to relevant property triggers an IHT exit charge (the trust is treated as leaving the qualifying IIP regime — s65 IHTA or s52 IHTA — specialist advice required). | The TSI rules mean that old IIP trusts can preserve their s49 status through beneficiary changes — but ONLY if the specific TSI conditions are met. Before changing the beneficiary of any IIP trust created before 22 March 2006: trustees should take specialist advice to ensure the TSI conditions are satisfied. A failure to satisfy the TSI conditions can inadvertently convert a tax-efficient IIP trust into a relevant property trust subject to indefinite 10-yr charges. |
| New IIP trust created after 22 March 2006 — RELEVANT PROPERTY (NOT s49) | A NEW IIP trust created by LIFETIME SETTLEMENT after 22 March 2006 (where neither the IPDI nor the disabled person's interest exception applies): is treated as RELEVANT PROPERTY — the same IHT treatment as a discretionary trust. The settlor makes a CLT (entry charge — 20% on excess above the NRB at the time). No s49 treatment — the IIP beneficiary is NOT treated as owning the trust fund. 10-yr periodic charges (s64 IHTA — up to 6% of the trust value at each 10-yr anniversary). Exit charges (s65 IHTA — when assets leave the trust). The IIP beneficiary's entitlement to income does NOT make the trust fund part of their estate for IHT. On the life tenant's death: the trust does NOT settle IHT from the life tenant's estate; the trust continues and pays 10-yr and exit charges as relevant property. | The VERY IMPORTANT CHANGE since FA 2006: any attempt to create a new IIP trust by lifetime settlement (after 22 March 2006) and have the IIP beneficiary's entitlement treated as 'owning the fund' for IHT FAILS — there is no s49 treatment for a new post-FA 2006 lifetime IIP trust. This catches many people who use old-style trust deed templates that pre-date FA 2006 and assume the old rules apply. A solicitor drafting a trust deed after 22 March 2006 must advise the client that a lifetime IIP settlement will be relevant property — not a PET and not s49. | Practical consequence: if you want to create a life interest trust (IIP trust) after 22 March 2006 and have the IIP beneficiary treated as owning the fund: the ONLY way to achieve s49 treatment is: (1) create the trust by will (IPDI — takes effect on your death); or (2) for a disabled beneficiary (s89B). Lifetime trusts creating IIPs after FA 2006: relevant property; 10-yr charges; higher overall IHT cost in most cases. Use a will-based IPDI trust for surviving spouse planning — it achieves s49 treatment (IIP beneficiary treated as owner) and avoids relevant property charges entirely. A discretionary trust (if flexibility is needed) is the alternative — same IHT treatment as a post-FA 2006 IIP trust but with more trustee discretion. |
| Disabled person's interest (s89B IHTA 1984) | A trust that is a 'disabled person's interest' retains s49 treatment regardless of when it was created (before or after 22 March 2006). The disabled beneficiary is treated as owning the trust fund under s49. The trust is NOT relevant property: no 10-yr charges; no exit charges. Who qualifies as a 'disabled person' for s89B: (a) a person in receipt of attendance allowance (AA), disability living allowance (care component — middle or higher rate), personal independence payment (daily living component — standard or enhanced rate), armed forces independence payment, or constant attendance allowance; (b) a person who, because of a mental disorder, lacks capacity within the meaning of the Mental Capacity Act 2005 to administer their property or manage their affairs; (c) a person who is receiving treatment for cancer or with a terminal illness. s89 IHTA (the older provision): where the only beneficiary of a trust is a disabled person AND any income not applied for the disabled person's benefit is accumulated (not distributed) — the trust is also treated as a disabled person's trust. SPECIAL SELF-SETTLEMENT RULE (s89A IHTA): a person can put assets into a self-settled disabled person's trust for their own benefit (trust for themselves) while they have capacity — the creation is NOT a transfer of value (no IHT on creation). The trust fund is treated as still in the settlor's estate under s49. On the settlor's death: the trust fund is in their estate for IHT (but typically with a nil or low IHT liability if the estate is not large, or with BPR/APR on qualifying assets). | s89B applies to trusts created at any time — before or after 22 March 2006. The key is that the trust meets the s89B conditions at the relevant time. If a beneficiary ceases to be a 'disabled person' (e.g., recovers): the s89B status may be lost — specialist advice required. The trust can then become relevant property or may need to be restructured. | For disabled beneficiaries: a disabled person's trust (s89B) is the most IHT-efficient structure. No relevant property charges. The disabled person can also benefit from the trust assets during their lifetime. On their death: the trust fund is in their estate (s49 — treated as owned by them); IHT is assessed on the trust fund at the disabled person's marginal rate. The disabled person's own NRB and any available exemptions/reliefs reduce the IHT. WILL PLANNING: if a parent or other person wants to leave assets to a disabled child in a trust: use a will-based trust structured to qualify as a disabled person's trust (s89B) — specialist solicitor advice is essential. Do NOT use a standard discretionary trust (relevant property charges) if the s89B route is available. |
IIP trusts and IHT UK 2026. s49(1) IHTA 1984: a person beneficially entitled to an interest in possession in settled property shall be treated as beneficially entitled to the property in which the interest subsists. s49(1A)-(1B): qualifications introduced by FA 2006 — s49(1) only applies to certain interests: an interest in possession to which a person becomes entitled under a will or intestacy (IPDI — s49A); a disabled person's interest (s89B); a transitional serial interest (ss49B-49D); an interest in possession subsisting immediately before 22 March 2006. FA 2006: Finance Act 2006 ss156-160 and Schs 20-21 — fundamentally changed the IHT treatment of trusts from 22 March 2006. The key changes: (1) lifetime gift into an IIP trust (post-22 March 2006) = CLT (not PET); the trust is relevant property; s49 does not apply; (2) IPDI (s49A IHTA) carved out: a trust which arises on a death (under a will or intestacy) and in which an individual becomes entitled to an interest in possession immediately on the death; (3) disabled person's interest (s89B — replaced the older s89 regime with a wider definition of qualifying disabled persons from 22 March 2006); (4) TSI (ss49B-49D) — transitional protection for old trusts. Relevant property: property in a settlement in which there is no qualifying interest in possession (s58(1) IHTA). A new lifetime IIP settlement (post-22 March 2006) has an IIP — but the IIP does NOT qualify under s49 (because it is not an IPDI/disabled/TSI) — therefore the trust fund is relevant property. This creates the paradox: a post-FA 2006 lifetime IIP settlement is relevant property (periodic/exit charges apply) but the IIP beneficiary has a right to income. IPDI conditions (s49A IHTA 1984): (i) the interest is one to which the beneficiary becomes entitled on the death of another person; (ii) the interest arose immediately on the death (not after some condition or delay); (iii) the interest arose under a will or intestacy (not under a lifetime trust). Disabled person's interest (s89B IHTA 1984): introduced by FA 2006. A disabled person's interest subsists where the settled property is held for the benefit of a disabled person and (a) during the lifetime of the disabled person no interest in possession subsists (other than a disabled person's interest); (b) the disabled person is entitled to not less than half of the income of the settled property (or no income is applied for the benefit of any other person). FA 2006 Sch 20 para 1: a 'disabled person' means: (a) a person who satisfies the conditions in s89(4)(a)-(c) IHTA 1984 [as substituted by FA 2006]; (b) a person who under Part VII of the Social Security Contributions and Benefits Act 1992 is entitled to attendance allowance; (c) a person who under Part II of SSCBA 1992 is entitled to disability living allowance by virtue of entitlement to the care component at the highest or middle rate; (d) a person entitled to personal independence payment; (e) a person entitled to armed forces independence payment or constant attendance allowance; (f) a person who suffers from such physical or mental disability that they are by reason of that disability unable to take care of themselves. S89A: self-settlement by disabled person — the settlement of property by a disabled person for their own benefit is not a transfer of value if the disabled person is the only eligible beneficiary during their lifetime. TSI (s49B IHTA 1984): s49B — a 'transitional serial interest' arises where: (a) immediately before 22 March 2006, a person was beneficially entitled to an interest in possession in settled property; (b) on or after 22 March 2006, that person's interest comes to an end during that person's lifetime; (c) the settled property (or part) becomes held on trusts giving another person an interest in possession; (d) the conditions in s49B(2) are met. s49C: TSI in pre-22 March 2006 settlement where the interest in possession comes to an end on the death of the beneficiary and another person then becomes entitled to an interest in possession. s49D: disabled person's TSI. Spouse exemption and IPDI: s18 IHTA — a transfer of value is exempt if the value transferred becomes comprised in the estate of the transferor's spouse/CP. If on the first spouse's death: the estate passes to an IPDI trust for the surviving spouse — the surviving spouse is treated as owning the trust fund (s49 + s49A). The transfer INTO the IPDI trust is exempt under s18 (as if the assets passed directly to the spouse). The RNRB and IPDI: HMRC Capital Gains and Inheritance Tax Manual IHTM46021 — the RNRB can apply to a QRI (qualifying residential interest) that passes from a settlement in which the deceased had a qualifying IIP (s49 treatment) to direct descendants. The deceased must have had an IIP in the trust (IPDI); the QRI must pass to their lineal descendants; the home must have been the deceased's residence (or they must qualify for the downsizing additions). Periodic and exit charges (ss64-65 IHTA): only apply to relevant property trusts — not qualifying IIP trusts (pre-2006; IPDI; disabled; TSI). For qualifying IIP trusts: IHT is borne by the life tenant's estate on their death (the trust fund in the life tenant's estate at their marginal rate).
Frequently Asked Questions
What is an interest in possession trust for inheritance tax purposes?
An interest in possession (IIP) trust is a trust where a beneficiary (the 'life tenant') has the right to receive all the income of the trust as it arises — or the right to occupy property (such as the family home). For IHT: if the IIP trust qualifies under s49 IHTA 1984 (or s49A for IPDIs, s89B for disabled persons), the life tenant is treated as OWNING the trust assets — the trust fund is part of their estate for IHT. When the life tenant dies: IHT is assessed on the trust fund as part of their estate. Finance Act 2006 changed the rules: NEW IIP trusts created by lifetime settlement after 22 March 2006 are treated as 'relevant property' (like a discretionary trust) — NOT s49 treatment. Only qualifying IIP trusts (pre-2006; IPDI; disabled person's interest; TSI) retain the s49 treatment.
What is an Immediate Post-Death Interest (IPDI) trust?
An IPDI (s49A IHTA 1984) is an interest in possession trust that arises IMMEDIATELY on the death of the testator — created by a will or intestacy. The IIP beneficiary (often the surviving spouse) is entitled to income from the date of death. Key IHT features: (1) the IIP beneficiary is treated as owning the trust fund under s49 — the fund is in their estate; (2) NOT relevant property — no 10-yr periodic charges; no exit charges; (3) spouse exemption (s18 IHTA) applies if the surviving spouse is the IPDI life tenant — the IPDI trust fund is treated as passing to the surviving spouse IHT-free on the first death. Example: 'All my estate to my spouse for life, then to my children.' The surviving spouse has an IPDI — the estate (including the home) is in the spouse's estate for IHT. On the spouse's death: the RNRB may apply to the home if it passes to children via the trust. The IPDI is the standard structure for surviving spouse will trusts in modern estate planning.
How are IIP trusts taxed after Finance Act 2006?
Finance Act 2006 (22 March 2006) fundamentally changed IHT for trusts: BEFORE 22 March 2006: ALL IIP trusts (created by will or lifetime settlement) had s49 treatment — the IIP beneficiary treated as owning the trust fund; no 10-yr charges. AFTER 22 March 2006: (1) NEW IIP trusts created by LIFETIME SETTLEMENT are treated as RELEVANT PROPERTY — 20% CLT entry charge; 10-yr periodic charges (s64 IHTA — up to 6%); exit charges (s65 IHTA). The IIP beneficiary is NOT treated as owning the fund. (2) IPDI trusts (created by will — arising on death): RETAIN s49 treatment — IIP beneficiary treated as owning the fund; no 10-yr charges. (3) Disabled person's interest trusts (s89B IHTA): retain s49 treatment at any time. (4) Transitional Serial Interests (ss49B-49D): s49 preserved through specific beneficiary changes in old trusts. The practical takeaway: use will-based IPDI trusts (not lifetime IIP trusts) if you want s49 treatment after FA 2006.
What happens when the life tenant of an IPDI trust dies?
When the life tenant (IIP beneficiary) of an IPDI trust dies: (1) the trust fund is treated as part of the life tenant's estate for IHT (s49 IHTA 1984); (2) IHT is assessed on the life tenant's OWN assets PLUS the IPDI trust fund at their death; (3) the life tenant's NRB, RNRB, and any other reliefs (BPR, APR, charitable legacies) reduce the IHT on the combined estate; (4) the trust fund then passes to the remaindermen (the next beneficiaries — e.g., the children) — this is not a further chargeable transfer (the IHT was already paid through the life tenant's estate); (5) if the IPDI trust held the family home and it passes to the children: the RNRB (up to £175k per parent) may apply — specialist advice needed. Note: if the IPDI was for the SURVIVING SPOUSE — the s18 spouse exemption applied on the first death (the IPDI trust was exempt); on the surviving spouse's death: the tNRB (transferred from the first spouse) is available in addition to the surviving spouse's own NRB — up to £650k combined.
What is a Transitional Serial Interest (TSI) for IHT?
A Transitional Serial Interest (TSI) is a special category of IIP trust that preserves the s49 IHTA treatment (IIP beneficiary treated as owning the trust fund) after Finance Act 2006, even though the trust underwent a change of IIP beneficiary. TSIs apply in two main situations: (1) s49B IHTA: where an IPDI terminates and the trust property immediately becomes held on a new IIP for another beneficiary (rather than becoming discretionary); (2) s49C IHTA: where a trust that was in existence on 22 March 2006 WITH an IIP beneficiary changes its IIP beneficiary after that date — the new beneficiary has a TSI; s49 treatment continues. The TSI rules are complex — the conditions must be precisely met. If the conditions are NOT met: the trust converts to relevant property (10-yr charges begin; an exit charge applies). Before changing the beneficiary of any pre-FA 2006 IIP trust: trustees must take specialist legal and tax advice to ensure the TSI conditions are satisfied.
A Will With an IPDI Trust Is the Safe Way to Create an IIP for a Surviving Spouse
A lifetime IIP settlement after FA 2006 = relevant property charges. An IPDI trust in a will = no periodic charges; spouse treated as owning the fund; RNRB potentially available. WillSafe will kits from £39.99.
View Will Kits from £39.99