What is a ‘section 144’ discretionary will trust?

HM Courts & Tribunals Service statistics show that from approximately 580,000 deaths a year in England and Wales, 125 probate cases were formally contested in the High
Court in 2024. Many more would be heard but for inheritance tax (IHT) provisions in IHTA 1984, s 144.

Whatever the reasons for any contest, a section 144 discretionary will trust is one of the most relied upon provisions available to families and their advisers should an individual’s will not turn
out to be practical or tax-efficient or if, when the will is drawn up, the testator is unsure whether to bequeath certain assets to particular beneficiaries.

Benefit of a section 144 discretionary trust

A trust within IHTA 1984, s 144 can only operate if a discretionary trust is created in the will. Under a discretionary trust, the beneficiary is not entitled to either the trust income or the trust
property; instead, it is at the absolute discretion of the trustees as to how both are distributed (if distributed at all), depending on the terms of the trust deed.

Ordinarily, such a trust falls within the ‘relevant property’ regime, and any distribution can be subject to an IHT ‘exit charge’ when assets are finally distributed to a beneficiary.

IHTA 1984, s 144 can allow trustees of a discretionary will trust to make decisions after death but have them treated as if they had been written into the will. Therefore, where property comprised in the discretionary will trust is appointed out, the section effectively treats the property as though it had been a gift under the original will.

The IHT ‘exit charge’ that would otherwise apply is not levied. This gives flexibility to a discretionary will trust such that the testator effectively transfers the decision as to who will benefit to the trustees; they can make such decisions at a future time in the light of prevailing circumstances of the beneficiaries.

Conditions

IHTA 1984, s 144 changes the outcome if the trustees act within two years of the date of death by appointing the trust assets to a beneficiary or into certain other types of trust such as an interest
in possession trust or a trust for a bereaved minor.

Note that the two-year deadline is strictly applied.

Solving a problem

If the appointment were to the surviving spouse, IHTA 1984, s 144 would allow the surviving spouse’s personal representatives to claim a 100% transferable nil-rate band on the second death.

Other taxes

Any income the trust receives before the appointment is made is taxed under the normal discretionary trust rules and tax rates.

When a capital distribution is made to a beneficiary from a discretionary will trust, it will be a chargeable event for capital gains tax (CGT) purposes and chargeable assets if the assets
transferred are shares, or property etc. but not cash.

The trust will be assessable on any gain arising if the asset has appreciated in value during the administration period. Importantly, HMRC has stated that an appointment under IHTA 1984, s
144 is not an IHT chargeable transfer; therefore CGT holdover relief under TCGA 1992, s 260 is not available (although other holdover reliefs may be, if certain conditions apply). If other reliefs are not available, the beneficiaries’ CGT base cost for any future disposal under IHTA 1984, s 144 will be the market value.

Practical tip

No claim or statement of interest is necessary for IHTA 1984, s 144 to be valid; however, a formal deed of appointment would be required. HMRC has confirmed that a distribution can qualify provided the conditions are satisfied