A settlement is made when property is held in trust for successive beneficiaries, and the property which a ‘settlor’ puts into trust is called the trust fund or ‘settled property’.
Settlor
For inheritance tax purposes, a settlor is the person who makes a settlement or directly or indirectly provides the assets for a settlement
Settled property
For inheritance tax, settled property includes property held in trust for successive beneficiaries, for any individual, but subject to a contingency (such as attaining a specified age) or under which the income is payable at someone’s discretion or has to be accumulated.
Property that is held under arrangements governed by the laws of another country, which have the same effect, is also settled property.
Not all property held in trust is settled property. For instance, property that is held by trustees who must distribute it to specified people is not settled property.
Some property not held in trust is settled property. For instance, property that is subject to a lease for life if the lease was not granted for full consideration in money or money’s worth may be regarded as settled property.
Tax on Settled Property
The taxation of settled property depends on the rights of the beneficiaries at the time in question. For example, if an individual is beneficially entitled to an ‘interest in possession’ in the trust assets, tax is charged when the interest comes to an end on or within seven years before the individual’s death as if they had transferred the assets as absolute owner. There are some exceptions.
If no individual has an interest in possession, tax is charged by treating the trust itself as a separate entity. Trusts that don’t have an individual who is entitled to an interest in possession are called ‘discretionary trusts’.
Since these rules depend on the rights of the beneficiaries at the time in question, there is no final classification of either the trust, or the property in it.
Both sets of rules may apply to the same property at different times or to different parts of the trust at the same time.