IHT Section 144 IHTA 1984: 2-Year Reading-Back of Will Trust Appointments

The deceased's will establishes a discretionary trust — rather than leaving specific assets directly to named beneficiaries. The trustees are given discretion over who benefits, in what proportions, and when. This structure is often used where the testator is uncertain at the time of writing the will who should benefit and in what proportions, or where the family's circumstances may change between the will being made and the death.

Within 2 years of the date of death, the trustees exercise their power of appointment and direct that specific assets pass to one or more named beneficiaries. The appointment is made by a formal deed executed by the trustees in accordance with the trust deed. The 2-year window is strict — an appointment made after 2 years does not benefit from s144 reading-back and is subject to the relevant property regime (potentially an exit charge).

Under s144 IHTA 1984, the appointment is treated for IHT purposes as if the deceased had left the appointed assets directly to the appointed beneficiary in their original will. The trust is effectively ignored for IHT — the assets are treated as passing straight from the deceased to the beneficiary at the date of death. This means: (1) the spousal exemption applies if the appointed beneficiary is the surviving spouse or civil partner; (2) the charitable exemption applies if the appointed beneficiary is a charity; (3) the NRB is available against the appointed assets; (4) no IHT exit charge arises on the appointment (which would otherwise apply to a discretionary trust making a capital distribution within the first 10 years).

The s144 reading-back is particularly powerful where: (1) the will trust initially appointed assets to a non-exempt beneficiary (e.g. a child) but the family subsequently decides that the surviving spouse should benefit — an appointment to the spouse within 2 years triggers the spousal exemption retrospectively; (2) the estate would benefit from a charitable gift — an appointment to charity within 2 years qualifies for the charitable exemption and may also reduce the applicable IHT rate on the rest of the estate to 36%; (3) the trustees want to take advantage of BPR or APR on specific assets — the appointment can direct qualifying assets to beneficiaries in a way that preserves those reliefs.

Does s144 apply to all types of will trusts?

Section 144 applies specifically to trusts that are (or include) 'relevant property' within the charge to IHT under Chapter III IHTA 1984 — in practice, discretionary trusts established by the will. It does not apply to: IPDIs (life interest trusts created immediately by the will) — these are qualifying interests in possession, not relevant property; bereaved minors trusts or 18-to-25 trusts; or absolute gifts in the will (which are not trusts at all). The s144 route is specifically designed for the situation where a testator has created a discretionary trust in the will (often an 'NRB discretionary trust' or a fully discretionary trust) and the trustees subsequently exercise their powers to distribute capital. HMRC has confirmed that s144 applies even if the discretionary trust was only relevant property for a fleeting moment (e.g. where the entire trust fund is appointed out within days of death).

What is the CGT treatment of a s144 appointment?

For CGT purposes, a s144 appointment is treated as a disposal by the trustees and an acquisition by the appointed beneficiary. However: (1) The trustees are treated as acquiring the assets at the date-of-death market value (the CGT uplift on death applies — the deceased's personal representatives transfer assets to the will trust at the date-of-death value, resetting the base cost). (2) If the appointment is made at or shortly after the date of death, the sale proceeds (if the beneficiary sells immediately) are likely to be very close to the CGT base cost, meaning little or no CGT. (3) The s144 IHT reading-back does NOT apply to CGT — the CGT follows the trust mechanics (trustee disposal to beneficiary) not the IHT fiction (direct legacy from deceased). This means the CGT and IHT positions are assessed differently: for IHT, the appointment is read back as a direct legacy; for CGT, it is a disposal by the trustees to the beneficiary at market value at the date of appointment.

Can s144 be combined with a deed of variation?

Section 144 (will trust appointment) and s142 (deed of variation) are separate reading-back provisions that can, in principle, both apply to the same estate. However, they operate differently: s142 is used by beneficiaries who have inherited directly under the will (or intestacy) to redirect their inheritances; s144 is used by trustees of a discretionary will trust to appoint capital. They cannot be combined on the same asset — once assets are in the trust, the s144 route applies to those assets (not s142). Where a will divides the estate between a direct legacy (to which s142 could apply) and a discretionary trust (to which s144 applies), both provisions may be used in parallel on different parts of the estate within the respective 2-year windows.

Is there a s144 equivalent for appointments of income rather than capital?

Section 144 applies to appointments of trust 'property' — which includes both capital and accumulated income. However, for s144 to apply, the appointment must be of capital out of the discretionary trust — an appointment of a life interest in the income (rather than an outright capital appointment) may qualify for s144 if the life interest immediately vests in the appointed beneficiary, effectively creating an IPDI under the appointment. HMRC accepts that s144 can apply to create an IPDI from an appointment out of a discretionary will trust — provided the appointment gives the beneficiary an immediate life interest in the appointed property and satisfies the other s49A conditions. This is a more complex analysis and specialist advice should be sought.

What is the deadline for a s144 appointment and can it be extended?

The s144 window is exactly 2 years from the date of death — no extension is available. An appointment made on day 731 or later does not benefit from s144 and is treated as a standard exit charge from the relevant property trust. The trustees must act within the 2-year period. In practice, this means: (1) the grant of probate and the administration of the estate must be progressed promptly so that the trustees can make an informed appointment within the window; (2) if the trustees are uncertain about the best appointment, they may make a provisional appointment within the 2 years and refine the distribution later (noting that a later amendment to the appointment may fall outside the 2-year window); (3) HMRC has no discretion to extend the window — it is an absolute statutory time limit.

What happens if a s144 appointment to the surviving spouse triggers an RNRB interaction?

Where a s144 appointment is made to the surviving spouse, the assets are treated for IHT as passing directly from the deceased to the surviving spouse — qualifying for the spousal exemption on the first death. The RNRB position: if the appointed assets include the deceased's residence, the RNRB is NOT available on the first death (because the residence is treated as passing to the spouse — qualifying for spousal exemption, not RNRB). However, the transferable RNRB (TRNRB) should be available on the second death, preserving the first death RNRB for use on the surviving spouse's estate. Executors and trustees should model the RNRB and TRNRB interaction carefully when considering a s144 appointment of residential property to the surviving spouse.