SVM108250 | Inheritance Tax: Interests in possession - post Finance Act 2006

The trust regime introduced by the Finance Act 2006 made a number of fundamental changes to the Inheritance Tax treatment of trusts.

An individual entitled to an Interest in Possession which came into existence before 22 March 2006, was and still is deemed to own the settled property in which their interest subsists, section 49(1) IHTA 1984.

Where a person becomes beneficially entitled to an interest in possession in settled property on or after 22 March 2006, the interest will only be treated as forming part of their estate for IHT purposes if it is one of the following:

· An immediate post death interest

· A disabled person’s interest

· A transitional serial interest

Such interests, together with beneficial interests in possession to which an individual became entitled before 22 March 2006, are known as ‘qualifying interests in possession’ (section 59(1) IHTA 1984). Subject to certain special cases, settled property in which no qualifying interest in possession subsists is known as ‘relevant property’ (sections 49(1a) and 58(1) IHTA 1984). SeeIHTM16061.

Where, after 22 March 2006, settled property in which an interest in possession subsists is treated as forming a part of the estate because it is not relevant property, unquoted shares included in the settled property are aggregated with other holdings in the estate for valuation purposes. (See example 1 below).

Example 1

A has a life interest that is not relevant property, in 150 shares of NQ Ltd and there are a further 200 shares in their free estate. On their death a valuation of 350 shares is required. If A has made a chargeable lifetime transfer of 100 shares out of their free estate holding (or a potentially exempt transfer (PET) which becomes chargeable as a result of their death within seven years), the loss to the estate principle would apply and the valuations required would have been

· before the transfer - 350 shares

· after the transfer - 250 shares

and the value transferred would be the difference between the two values.

If however A's interest in possession comes to an end in their lifetime, for example by the release of the whole or part of his life interest, the loss to the estate principle does not apply. (See example 2 below).

Example 2

The facts are as at Example 1. A releases a life interest that is not relevant property, in 50 shares. A valuation is required of 50 shares as part of a holding of 150 shares (not as part of 350).

Note that in these circumstances, however, business relief, agricultural relief and instalment questions are determined by reference to the total holding in A's estate before the release, in other words 350 shares in this example. See SVM111000 and IHTM04094. Whether the transfer is out of property held in an interest in possession trust, in other words whether their claim arises under sections 51-52 IHTA 1984, and state that the interest is a qualifying interest in possession.

Additional Guidance: SVM150000