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HMRC internal manual

Inheritance Tax Manual

Settled property: the charge where an interest in possession comes to an end following a potentially exempt transfer

There are special provisions that apply where an interest in possession (IIP) (IHTM16000) that was created by a PET (IHTM04057) comes to an end and the property is subsequently settled on discretionary trusts. (IHTM16000) These provisions are to prevent a settlor with a high cumulative total who wishes to create a discretionary trust reducing their tax bill by subjecting his intended trust to an initial short-term IIP in favour of an individual with a low or nil cumulative total. In this way, the settlor’s gift is a PET and the tax due when the IIP comes to end (which would be immediately chargeable as a transfer to a discretionary trust) would be based on the circumstances of the ‘life tenant’.

The charge still arises under IHTA84/S52 (1), but the rate of tax is calculated in a special way (IHTM16000) on IHTA84/S54A and IHTA84/S54B.

In relation to the death of a person who became beneficially entitled to an interest in possession on or after 22 March 2006, the special calculation rules in Ss54A and 54B will apply only if the interest is a disabled person’s interest or a transitional serial interest, S54A (1A).