Inheritance Tax Act 1984 section 88

Protective trusts

Section 88 deals with the inheritance tax treatment of protective trusts, explaining how the failure or determination of such trusts affects the principal beneficiary's position, with different rules depending on whether the trust was created before or on/after 22 March 2006.

• A protective trust gives a beneficiary an interest in possession until a divesting act (such as bankruptcy) occurs, at which point the trust automatically converts into a discretionary trust for the beneficiary and their family — for inheritance tax purposes, the divesting act is ignored and the beneficiary is still treated as having an interest in possession.
• Where a protective trust was created before 22 March 2006 and a divesting act occurs on or after that date, the beneficiary's resulting interest in possession is treated as if they had become entitled to it before 22 March 2006, so it continues to form part of their estate for inheritance tax purposes.
• Where a protective trust is created on or after 22 March 2006 and the beneficiary's original interest qualifies as an immediate post-death interest, a disabled person's interest, or a transitional serial interest, the interest arising after a divesting act is treated as a continuation of that qualifying interest, as though it had never ended.
• Where a protective trust is created on or after 22 March 2006 but the beneficiary's original interest does not qualify as an immediate post-death interest, a disabled person's interest, or a transitional serial interest, the favourable treatment under this section does not apply, and the trust will be subject to the relevant property regime with periodic and exit charges.