Section 144 IHT UK (2026): Appointments from a Discretionary Will Trust Within Two Years Read Back Into the Will

Section 144 of the Inheritance Tax Act 1984 provides a powerful post-death tax planning tool for estates that include a discretionary will trust: (1) THE BASIC CONCEPT: under general IHT principles, assets settled into a discretionary trust on death: (a) enter the trust free of IHT to the extent they are within the nil-rate band (the entry charge on a chargeable lifetime transfer does not apply on death — IHTA 1984 s.4); (b) but once in the discretionary trust, they become RELEVANT PROPERTY subject to: 10-year periodic charges; and exit charges when assets leave the trust; (2) THE S.144 READ-BACK: s.144 provides that where the trustees of a discretionary trust created by will make an appointment (a distribution or transfer of assets out of the trust) WITHIN TWO YEARS OF THE DEATH, that appointment is treated as if it had been made by the testator directly in their will at the date of death. The effect is that: (a) the appointment is read back into the will — it is treated for IHT purposes as if the testator had left the assets directly to the appointee, not through a trust at all; (b) the trust is treated as having never received those assets (or as having received them and immediately transferred them — the treatment achieves the same IHT result); (c) there is NO exit charge on the appointment from the trust; (d) the usual IHT treatment on death then applies to the assets in the hands of the appointee — i.e. assets passing to a surviving spouse attract the spousal exemption; assets passing to charity attract the charitable exemption; assets passing to children use the testator's nil-rate band and RNRB where applicable; (3) COMPARISON WITH s.142 (DEED OF VARIATION): s.144 operates on the same principle as a deed of variation under s.142 — but where s.142 is a variation made by the BENEFICIARIES of the estate, s.144 is an appointment made by the TRUSTEES of a will trust. The two provisions can both be used in the same estate if appropriate.

Section 144 is subject to several important conditions: (1) THE TRUST MUST BE A DISCRETIONARY TRUST CREATED BY WILL: s.144 applies only to trusts created by the will of the deceased — it does NOT apply to lifetime trusts or trusts created by intestacy. The trust must be a discretionary trust (relevant property trust) — not an interest in possession trust or other non-relevant-property trust. Most NRB discretionary will trusts qualify; (2) THE APPOINTMENT MUST BE WITHIN TWO YEARS OF DEATH: the trustees must make the appointment WITHIN TWO YEARS of the date of death. The two-year window runs from the day after death. An appointment made on the day of the second anniversary is within the window; an appointment made after that date is NOT within s.144 and would be subject to the usual exit charge rules; (3) NO POWER OF APPOINTMENT MUST HAVE BEEN EXERCISED IN THE INTERIM: s.144(1A) (introduced by the Finance Act 2006) provides that s.144 does NOT apply where: (a) a qualifying interest in possession has been created in the trust within the two years immediately after death. This prevents the read-back where the trustees have first created an interest in possession and then removed it — which would have allowed the read-back to avoid IHT on the intermediate gift; (4) THE APPOINTMENT MUST NOT RESULT IN A QUALIFYING INTEREST IN POSSESSION — SINCE IHTA 1984 AS AMENDED BY FA 2006: since the Finance Act 2006, an interest in possession can only arise in a trust free of relevant property charges if it is a qualifying interest in possession (IPDI, disabled person's interest, etc.). Creating a non-qualifying interest in possession in the discretionary will trust does not prevent s.144 applying to a subsequent appointment; (5) CGT — TCGA 1992 s.62(6): a related provision in the capital gains legislation provides that where s.144 applies, the CGT position is also read back — so the appointee is treated for CGT purposes as acquiring the assets at the probate value at death, and the 'uplift' in base cost on death (s.62(1)) is preserved for the appointee.

The nil-rate band (NRB) discretionary will trust is the most common structure that uses s.144: (1) THE NRB WILL TRUST: a married couple commonly drafts wills leaving the nil-rate band (currently £325,000) to a discretionary will trust on first death, with the remainder passing to the surviving spouse. The NRB trust: (a) is funded with assets up to £325,000 — within the NRB so no IHT on entry; (b) is relevant property — but with an NRB-sized fund, the notional periodic charge rate is nil (or very close to nil); (c) provides flexibility to benefit the surviving spouse, children, and other family members; (2) WHY THE NRB TRUST WAS HISTORICALLY USED: before the transferable nil-rate band was introduced in 2007, a spouse who did not use their NRB would lose it on death. The NRB will trust was essential to preserve both spouses' NRBs. Since 2007, the transferable NRB means the NRB trust is less essential for IHT purposes — but many wills created before 2007 still contain them; (3) THE TWO-YEAR DECISION WINDOW: where a will contains an NRB trust and the surviving spouse or trustees decide that the trust is not needed (e.g. because the transferable NRB makes it redundant), s.144 allows the trustees to appoint the trust assets BACK TO THE SURVIVING SPOUSE within two years of death. The appointment reads back as a direct bequest to the spouse — attracting the FULL spousal exemption. The surviving spouse's own estate is increased by the appointed assets, but they can now use the full transferable NRB of the first spouse to shelter their estate on second death; (4) THE DECISION PROCESS: the trustees of the NRB will trust must take professional advice before exercising s.144. The relevant considerations include: (a) whether the estate on second death will exceed the combined NRB and RNRB; (b) whether there are other beneficiaries (other than the surviving spouse) who should benefit from the trust; (c) whether the trust assets have changed significantly in value since death.

The practical power of s.144 lies in its ability to unlock exemptions and reliefs that would otherwise be unavailable to the trust: (1) SPOUSAL EXEMPTION — IHTA 1984 s.18: assets passing to a surviving UK-domiciled spouse are exempt from IHT. A s.144 appointment to the surviving spouse is treated as a direct bequest from the testator to the spouse — so the full spousal exemption applies. Without s.144, an appointment from the discretionary trust to the surviving spouse within 10 years would be subject to an exit charge; (2) RESIDENCE NIL-RATE BAND — IHTA 1984 s.8D: the RNRB (up to £175,000 in 2025-26) applies where the family home is 'closely inherited' — left to direct descendants (children, grandchildren). A discretionary will trust that holds the family home does NOT benefit from the RNRB unless the home is appointed out of the trust to qualifying direct descendants within two years. A s.144 appointment of the family home to a direct descendant reads back as a direct bequest to that descendant — potentially unlocking the RNRB; (3) CHARITABLE EXEMPTION — IHTA 1984 s.23: a s.144 appointment to a charity reads back as a direct bequest from the testator to the charity — qualifying for the full charitable exemption and potentially the reduced IHT rate of 36% under the 10% charity rule (IHTA 1984 s.24A); (4) CGT — TCGA 1992 s.62(6): when assets are appointed out of the trust under s.144, the appointee inherits the assets at probate value (the value at the date of death), with the CGT base cost uplift preserved. The trust's period of ownership is effectively ignored for CGT purposes. If the trust sells assets before the s.144 appointment, any gain in value between death and sale is a chargeable gain in the trust; (5) STAMP DUTY LAND TAX: where the s.144 appointment involves residential property, SDLT is NOT payable on the transfer from the trust to the appointee — SDLT is a tax on PURCHASES not on distributions from trusts in accordance with their terms.

A s.144 appointment requires careful documentation and timing: (1) DEED OF APPOINTMENT: the trustees exercise their power of appointment by executing a formal deed of appointment. The deed: (a) identifies the trust (by reference to the will and date of death); (b) identifies the trustees and their powers; (c) appoints specified assets (or a sum of money or a share of the trust fund) to specified beneficiaries; (d) states that the appointment is made within two years of death; (e) is signed and dated by all trustees; (2) TIMING: the deed must be dated (and effective) within two years of the date of death. HMRC accepts the date of execution of the deed as the date of the appointment for s.144 purposes. Backdating a deed is not permissible — start the process well before the two-year deadline; (3) NOTIFICATION TO HMRC — IHT100d: a s.144 appointment that changes the IHT position should be reported to HMRC on Form IHT100d (chargeable event in a discretionary trust). However, where the s.144 read-back means the appointment is treated as a direct bequest and the IHT treatment is already captured in the original IHT400, HMRC guidance indicates that no separate IHT100d is required. Take specialist advice on whether notification is needed; (4) LAND REGISTRY: where the trust holds registered land, a Land Registry application must be made to transfer the legal title to the appointee following the s.144 appointment; (5) PROBATE REGISTRY — WHERE THE ESTATE IS NOT YET FULLY ADMINISTERED: a s.144 appointment can be made even if the probate process is still ongoing — the two-year clock runs from death, not from the grant of probate. However, the trustees must have the assets of the trust in their control before they can appoint them; (6) PROFESSIONAL ADVICE ESSENTIAL: given the IHT and CGT consequences, all s.144 appointments should be made with professional advice from a specialist wills, trusts, and tax solicitor or chartered tax adviser.