IHTM46055 | Downsizing: disposals: qualifying former residential interest: interest in possession trust
From HM Revenue & Customs · Inheritance Tax Manual
The IHT definition of estate () includes all the property to which a person is beneficially entitled, so it includes property in which the person has a qualifying interest in possession (QIIP) (). If the person has a QIIP in a dwelling-house that they have occupied as their residence while the property was in their estate, this is a ‘residential property interest’
, which defines a QFRI (), requires the disposal to be by the person who has subsequently died. But where property is in a trust, it would usually be the trustees who made any disposal.
addresses this point by treating the disposal by trustees in those circumstances as a disposal by the deceased. In particular, it applies where a person (the beneficiary) has a QIIP in settled property which consists of or includes an interest in a dwelling-house as his residence.
Where the trustees of the settlement dispose of the interest in the dwelling-house to someone other than the beneficiary, or there is the coming to an end of the beneficiary’s interest in their lifetime, this will be treated as a disposal by the beneficiary for the purposes of RNRB, if:
The person’s interest in possession subsisted throughout the period from the time he became beneficially entitled to it up to the time of disposal, and
The interest in the dwelling-house is, or is part of, the settled property immediately before the disposal.
There are separate provisions for situations where the person had more than one dwelling-house that was a ‘residential interest’ - (4A, 4B, 4C) ().
In each case the property interest disposed of is limited to the extent of the deceased’s interest in possession.
In practice the following would qualify as disposals by the deceased:
the trustees selling a dwelling-house in the trust and buying a less valuable one;
the trustees selling a dwelling-house in the trust and not replacing it.
the trustees bringing the deceased’s interest in possession in a trust which includes a dwelling-house to an end in the deceased’s lifetime;
the deceased bringing their interest in possession in a trust which included a dwelling-house to an end during their lifetime.