IHTM16103 | Interest in part of a fund: use and enjoyment of part

In many cases of joint right of occupation, the interest of the beneficiary is easy to identify and although the Valuation Office (VOA) (IHTM23002) will advise on annual values, this approach may not be necessary. For example in a normal case, if there are three occupants equally entitled to occupy, it can be seen that the beneficial interest of each extends to one-third.

But IHTA84/S50 (5) ensures that this interest is not valued as a one-third share, with any appropriate ‘joint property’ discount because the formula -

• the beneficiary’s proportion of the annual value, divided by the aggregate of all annual values multiplied by the value of the property

produces a value based on the entirety value and excludes any notion of a ‘joint property’ discount.

The VOA should be asked for a value of the entirety. You should mention that you are interested in, e.g. one-third of that value without discount for joint ownership in order to avoid confusion. The position should also be explained to the taxpayer if they have not taken the point.

Note that IHTA84/S50 (5) begins: ‘where the person referred to in IHTA84/S49 (1) above is not entitled to any income of the property…..’. These words refer to this property, the one in which the beneficiary has use and enjoyment. The beneficiary may very well be entitled to a great deal of income from the rest of the settled fund, but that does not affect the application of IHTA84/S50 (5).

If the interest carries the right to let the property and receive a share of the income, S50 (5) does not apply [as this is not use and enjoyment in the sense of living in the property] but S50 (1) produces the same result.

The right of residence (sole or joint) (IHTM16131) gives an interest in possession to the beneficiaries in occupation. If the trusts provide that in addition to these occupants, a further beneficiary [who has no right of use and enjoyment] shall have a right to the income of the property, that beneficiary takes no immediate interest in possession - the interest in income is displaced by the interests in possession of the occupants - Statement of Practice SP10/79 last paragraph.

The ‘displaced’ interest may in practice be described as ‘postponed’ because the further beneficiary will take an interest in possession if still living when the occupants move out or die.

Where a house is given to A for life on condition that he permits B to reside there with him, it is considered that A has the sole interest in possession. B has no interest in the house. This view, which also applied for Estate Duty, might seem debatable, but it accords with the Pearson case - Pearson v IRC [1981] AC 753

A can, from the beginning, refuse to let B into the property and thereby lose his own life interest but whether he does that or not, there is nothing B can do about it. A can later terminate his occupation, which on these facts also terminates B’s occupation [the obligation being personal to A].

B has no present right of present enjoyment and therefore has no interest in possession. On these facts B will never acquire an interest in possession in the property.

As B has no enforceable right to stay in the property, his presence there has no effect on the value of the property when any IHT charge arises under IHTA84/S4 (death) or IHTA84/S52 (lifetime). There is no element of nuisance value because B, if so inclined, can only be a nuisance to the trustees.