Interest in Possession Trust IHT UK: IPDI, Disabled Person’s Interest and the 2006 Changes

Updated 31 May 2026 · 10 min read · Trusts & Inheritance Tax

An interest in possession trust gives one beneficiary (the life tenant) the right to income or use of trust assets during their lifetime, with the underlying capital passing to other beneficiaries (the remaindermen) on their death. For inheritance tax purposes, the rules depend critically on when and how the trust was created — the Finance Act 2006 drew a sharp dividing line that every estate planner, trustee, and beneficiary of such a trust needs to understand.

The Basic IHT Rule: Look-Through Treatment

Under section 49 of the Inheritance Tax Act 1984 (IHTA 1984), a beneficiary who has a qualifying interest in possession is treated for IHT purposes as if they were the absolute owner of the underlying trust capital. The trust capital is included in their taxable estate on death, and any lifetime transfer of their interest is their own PET or chargeable transfer — not the trust’s.

This ‘look-through’ treatment is powerful: it means a qualifying IIP trust is not subject to the 10-yearly periodic charges or exit charges that apply to discretionary (relevant property) trusts. IHT is simply deferred to the life tenant’s death, at which point the trust capital is charged as part of their estate. The life tenant’s own nil-rate band and, where applicable, the residence nil-rate band can be set against the combined estate including the trust.

The Finance Act 2006 Watershed

Before 22 March 2006, any interest in possession trust — whether created in a will, by a lifetime settlement, or otherwise — gave the life tenant the section 49 look-through treatment automatically. The Finance Act 2006 fundamentally changed this for new lifetime IIP trusts:

• Lifetime IIP trusts created after 22 March 2006 are treated as relevant property trusts — the 10-yearly periodic charge and exit charges apply; the life tenant is not treated as owning the capital.
• IIP trusts created on death (by will or intestacy) retain the look-through treatment, provided they qualify as an IPDI.
• Existing pre-2006 trusts continue to be taxed under the old rules for as long as the original pre-2006 life interest subsists.

The practical effect: if you want IHT look-through treatment for a surviving spouse or partner, you must structure the trust in the will — a lifetime settlement will no longer achieve it.

Immediate Post-Death Interest (IPDI)

An IPDI (section 49A IHTA 1984) is the most commonly used qualifying IIP in modern wills. The conditions are:

• The trust is created by will or intestacy (not by a lifetime settlement)
• The beneficiary’s interest starts on or immediately after the testator’s death
• No other interest in possession existed in the same property between the death and the start of this interest

Because an IPDI is a qualifying IIP, the spouse/civil partner exemption under IHTA 1984 section 18 applies: where a will gives a surviving spouse an IPDI, the entire trust fund is 100% exempt from IHT on the first death regardless of its size. No periodic or exit charges arise during the life tenant’s lifetime. IHT is charged only when the life tenant dies, at which point the trust fund is added to their own estate and taxed once.

This is the backbone of many modern nil-rate band wills: a discretionary trust is funded up to the nil-rate band on the first death, and the surplus passes to the survivor as an IPDI — entirely IHT-exempt and not subject to relevant property charges.

Disabled Person’s Interest (DPI)

A disabled person’s interest (sections 89 and 89A IHTA 1984) is a qualifying IIP for beneficiaries who are legally disabled at the time the settlement is created. The trust must be drafted so that at least half of the settled property applied during the disabled person’s lifetime is applied for their benefit.

A DPI trust is treated as if the disabled person owns the capital for IHT. Crucially, a disabled person can create a DPI trust from their own funds without triggering the gifts with reservation rules — which makes it a rare exception to the general rule that you cannot create an IHT-efficient IIP trust for yourself. HMRC requires clear medical evidence of disability and careful trust drafting for DPI status to be recognised.

Transitional Serial Interests (TSI)

A transitional serial interest arose in the years immediately following the 2006 changes. Where an existing pre-2006 IIP trust had one life tenant die, and a new interest then arose in the same property for another beneficiary, that new interest could qualify as a TSI — and continue to receive look-through IHT treatment — provided it arose:

• Before 6 October 2008 (for general TSIs); or
• Within two years of the previous life tenant’s death, where the new beneficiary was the deceased’s spouse or civil partner

TSIs arising outside these windows are treated as relevant property. Most TSI issues are now historical, but they arise occasionally in long-running family trusts where life tenancies have been changing hands.

IHT on the Life Tenant’s Death

When a qualifying life tenant dies, the trust capital is aggregated with their personal estate and IHT is charged on the combined total above the available nil-rate band (currently £325,000, plus RNRB where applicable). The trustees pay the IHT attributable to the trust portion from the trust fund; the executors pay IHT on the personal estate from the estate assets. The life tenant’s own unused transferable nil-rate band (from a deceased spouse) can be claimed and applied to the combined estate.

After IHT is settled, the remaindermen receive the net trust capital — either outright, or into a further trust depending on the will’s terms. The CGT position must also be considered: on death, the base cost of trust assets is uplifted to market value (section 72 TCGA 1992), eliminating any accrued capital gains within the trust up to that point.

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