Why section 144 of the Inheritance Tax Act 1984 may be important after a death

Some older Wills place all or part of the estate into a discretionary trust. That can provide valuable protection and flexibility, but it is important to review the trust within two years of death. In the right circumstances, the trustees may be able to make an appointment under section 144 so that, for Inheritance Tax purposes, the Will is treated as though it had originally directed the property to pass in that way.

Why might a review be worthwhile?

  • Tax rules and family circumstances may have changed since the Will was signed.
  • A discretionary trust does not normally allow the Residence Nil Rate Band (RNRB) merely because children or grandchildren are included among the possible beneficiaries.
  • Where suitable trustee powers exist, an appointment made within two years of death may allow section 144 to treat the property, for Inheritance Tax purposes, as though it had passed under the Will in accordance with that appointment.
  • This can sometimes preserve a valuable RNRB that might otherwise be unavailable.

A particularly useful possibility

It does not necessarily follow that the whole discretionary trust should be brought to an end. Where a qualifying residence is involved, the trustees may consider whether the residence (or an appropriate share of it) should be appointed to one or more qualifying direct descendants, while other assets – such as cash or investments – remain within the discretionary trust.

This can be especially useful where the principal beneficiaries are adults and their own adult children are also within the family group. The trustees can consider the needs of the children and grandchildren, the value of the residence, the available RNRB and the reasons for retaining the balance of the estate in trust.

Why keep the balance in trust?

  • To retain flexibility between different members of the family.
  • To provide protection for beneficiaries who may not need or wish to receive the whole fund immediately.
  • To allow trustees to respond to future changes in family or financial circumstances.
  • To keep investments or cash under trustee control while dealing separately with the residence for RNRB purposes.
  • To preserve the wider protective purpose of the original Will as far as it remains appropriate.

The two-year deadline

The relevant period runs for two years from the date of death. It should not be treated as a date on which to start the review. The trustees need sufficient time to understand the Will, establish values, consider the beneficiaries’ circumstances and obtain appropriate legal and tax advice before signing any deed of appointment.

Suggested way forward

  1. Review the Will – Confirm the scope of the discretionary trust and the trustees’ powers of appointment.
  2. Establish the estate values – Obtain an up-to-date value for the residence and identify the other assets in the trust.
  3. Check the RNRB position – Confirm whether the deceased owned a qualifying residence, who the qualifying direct descendants are, and how much RNRB may be available, including any transferred RNRB where relevant.
  4. Consider the family objectives – Discuss whether the residence should pass to the children, the adult grandchildren, or a combination of qualifying descendants, and whether the remaining assets would be better retained in trust.
  5. Compare the tax and practical outcomes – Consider the Inheritance Tax result alongside the protection and flexibility offered by retaining part of the discretionary trust.
  6. Take specialist advice before acting – Section 144 is a technical provision. The proposed appointment should be checked before any deed is executed.
  7. Complete any appointment in good time – If an appointment is appropriate, execute the necessary deed before the second anniversary of death and keep a clear trustee record of the decision and its reasons.
  8. Deal with the tax reporting – Ensure the executors’ and trustees’ Inheritance Tax reporting and any RNRB claim reflect the final arrangement.

An important distinction

Possible outcome General RNRB position
Residence simply remains in the discretionary trust RNRB will not normally be available merely because direct descendants are potential beneficiaries.
Residence or qualifying share appointed to a direct descendant within two years Section 144 may allow the appointment to be treated for Inheritance Tax purposes as though made by the Will, subject to the statutory conditions.
Other cash or investments remain in the discretionary trust This does not, of itself, prevent a separate qualifying appointment of the residence from being considered.

What section 144 does – and does not do

  • It is an Inheritance Tax provision. Its ‘read-back’ effect should not be assumed to apply in the same way for Capital Gains Tax, Income Tax or other purposes.
  • It does not mean that every appointment made within two years automatically produces the desired tax result.
  • The precise wording of the Will, the nature of the trust, what has happened to the property since death and the form of the proposed appointment all need to be considered.
  • The trustees must continue to exercise their powers properly and in the interests of the beneficiaries as a whole.