IHTM46056 | Downsizing: disposals: qualifying former residential interest: property subject to a reservation of benefit

The IHT definition of estate (IHTM46012) includes all the property to which a person is beneficially entitled. Where there is property subject to a reservation of benefit (IHTM14301) at the date of death, FA86/S102(3) provides that the person is treated as being beneficially entitled to that property immediately before the death. It follows that property subject to a reservation of benefit is part of the person’s estate on death for IHT purposes.

Where a person disposes of a residential property interest in a dwelling-house but continues to take some benefit from it, that property is subject to a reservation of benefit within the meaning of FA86/S102. Without specific rules, that original gift would be a disposal of a residential property interest, but there would also be a residential property interest in the estate on death.

The legislation (IHTA84/S8H(4D) therefore sets out the rules which apply to property subject to a reservation of benefit, and makes clear what is a disposal for downsizing purposes.

IHTA84/S8H(4D)(a) provides that the initial gift by the deceased is not treated as a disposal, and

IHTA84/S8H(4D)(b) provides that if the reservation of benefit comes to an end during the deceased’s lifetime in accordance with FA86/S102(4), this is treated as a disposal.