Budget Notes

BN46 INHERITANCE TAX: TRANSITIONAL SERIAL INTERESTS

Who is likely to be affected?

1. Trustees and beneficiaries of "interest in possession" (IIP) settlements set up on or before 21 March 2006.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to clarify the inheritance tax (IHT) rules where trusts in place on or before 21 March 2006 on IIP terms come to an end on or after 22 March 2006 and are replaced with new IIP trusts for the same beneficiary. In addition, the transitional period will be extended by six months to 5 October 2008.

Operative date

3. The measure has effect on and after 22 March 2006.

Current law and proposed revisions

4. Schedule 20 to the Finance Act 2006 changed the IHT rules for IIP trusts. It included a transitional period from 22 March 2006 to 5 April 2008 to enable trustees to reorganise trusts set up on or before 21 March 2006 without being subject to the new rules.

5. The effect of those transitional provisions is unclear where pre-22 March 2006 IIP trusts are replaced with a "transitional serial interest" as defined in sections 49C, D and E of the IHT Act 1984 for the same beneficiary. This measure will ensure that the new rules will not have effect where this kind of change is made in the transitional period.

6. The legislation will also ensure that the new rules will have effect as intended where an IIP trust is replaced after the transitional period with a new IIP trust for either the same or a different beneficiary.

7. In addition, this measure extends the transitional period so that it will now end on 5 October 2008.

8. Draft legislation and explanatory notes have been published today on the HM Revenue & Customs website.

Further advice

9. If you have any questions about this change, please contact the Probate/IHT Helpline on 0845 3020 900. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk