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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Reversionary interests: reversion under own or spouse's/civil partners's settlement

A reversionary interest (IHTM16000) to which either the settlor (IHTM1600) of the underlying property or his spouse or civil partner (IHTM11032) is, or has been, beneficially entitled (IHTM04031) is not excluded property (IHTM04251) under the main provision unless either

  • the underlying property was settled before 16 April 1976, or
  • if that property was settled on or after 16 April 1976, the transferor (who is not the settlor or his spouse or civil partner) had acquired the interest before 10 March 1981.Thus on a transfer of a reversion by the settlor or his spouse or civil partner you should primarily concern yourself with the date when the underlying property was settled. In any other case you may, in addition, need to consider when and how the transferor had acquired the reversionary interest.

There are special rules concerning a reversion owned by the settlor or his spouse or civil partner which are designed to prevent possible avoidance of tax through the creation of short-term settlements. Under such a settlement a valuable reversion would be given to the settlor or spouse or civil partner. Either would transfer the reversion on to a third party, and claim that the transfer was of excluded property.

Example 1

S settles property to pay income to his son for 10 days with remainder to Mrs S. Within those 10 days, Mrs S transfers her reversionary interest to the son who then becomes absolutely entitled to the settled property.

The making of the settlement by S is a PET, but only to the extent of the very small loss to his estate relating to the son’s 10 day income interest. The rest of the loss to S’s estate relates to the reversion given to Mrs S, and is exempt as a transfer between spouses, (IHTM11031) IHTA84/S18. The termination (IHTM04084) of the son’s interest in possession (IHTM16000) (IIP) in the settled property does not give rise to a charge as the person whose interest comes to end becomes entitled to the property (IHTM16000) IHTA84/S53 (2).

However the exception provided in IHTA84/S48 (1)(b) means that Mrs S’s reversionary interest is not excluded property in her hands. The gift of that interest to the son therefore is a PET (IHTM04057) and this prevents what would otherwise be a virtually tax-free transfer of funds from S to his son.

Example 2

The facts are as Example 1 except that Mrs S transfers her reversionary interest to the son after the death of S but within the 10 day income period.

Again, as the reversionary interest is one to which the settlor’s spouse (Mrs S) has been beneficially entitled, the interest is not excluded property in her hands. Her transfer of that interest constitutes a PET.