29 Sep 2025

Taxation Readers’ Forum: Will an 18-25 trust meet the inheritance tax requirement?

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Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query about the inheritance tax (IHT) implications of grandparents using an 18-25 trust to leave their family home to their grandchild.

The tax query

‘My clients are a married couple, both aged 75. Their total asset worth at the present time is approximately £1.8m, of which approximately £400,000 is represented by the principal private residence with the balance in mostly cash, savings and deposits.

They are currently looking at leaving their family home on second death for the benefit of either their only adult daughter, or possibly their only grandchild. Currently the grandchild is 8 years old. Their preferred route is to leave the private residence to the grandchild.

In my limited experience of these kinds of matters, they could leave the property to the grandchild as an immediate post-death interest, and this should qualify for utilisation of the residence nil rate band by the estate of the last surviving party to the marriage. However, they have expressed a preference to ensure that the grandchild does not have full title to the property assets until he is 25.

Would the use of an 18-25 trust get over this problem? My understanding, however, is that an 18-25 trust established by a grandparent will not meet the requirements for the property to be closely inherited by the grandchild. Can readers shed any light on this?’ Query 20,590– Partridge.

Terry Jordan’s reply: An interest in possession trust is a possibility

‘Prior to 22 March 2006, provision could be made for young people (those under age 25) by means of an accumulation and maintenance (A&M) trust. A&M trusts were hybrids, starting as a form of discretionary trust, and one of the requirements was that the beneficiary or beneficiaries should become entitled to an interest in possession (or an absolute interest) no later than age 25. Lifetime transfers to such trusts were potentially exempt transfers (PETs) and the value was outside the relevant property regime of ten-year and proportionate or ‘exit’ inheritance tax charges. In 2006. the Labour Government, and particularly Dawn Primarolo, made A&M trusts part of their radical reforms to the IHT treatment of trusts.

Existing A&M trusts could be amended prior to 6 April 2008, so that beneficiaries would become absolutely entitled no later than age 18 and remain within the protection of IHTA 1984, s 71, or changed so that beneficiaries would become absolutely entitled at age 25, in which case the trust fell within the new 18-25 provisions with a limited charge on their 25th birthdays.

On death, a bereaved minor’s trust could arise under the will of a parent or of a person with parental responsibility or on the intestate death of a parent or a grandparent but could not arise under the will of a grandparent unless the grandparent had parental responsibility.

In 2007, George Osborne said that the Conservatives, then in opposition, would make the IHT nil rate band £1m. When elected with a majority in 2015, they introduced the residence nil rate band (RNRB) with effect from 6 April 2017, which is currently in force at £175,000. As with the ordinary nil rate band, it is transferable between spouses, subject to tapering if the value of either estate exceeds £2m. For the RNRB to apply requires all or part of a residence to be inherited by a direct descendant of the deceased. Grandchildren are direct descendants for this purpose and an interest in possession trust would satisfy the requirements of IHTA 1984, s 8J, as would a bereaved minor’s trust or an 18-25 trust but, as above, neither could be created by Partridge’s clients while their daughter is alive.

If it is decided to use an interest in possession trust in the will of the surviving grandparent, careful drafting will be required to exclude the operation of Trustee Act 1925, s 31, which would otherwise permit accumulation of income prior to the grandchild’s 18th birthday.’

The full article was published in Taxation magazine (issue 5003) and is available to subscribers here on the Taxation website.

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