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HMRC internal manual

Inheritance Tax Manual

Legal background - the meaning of property

General powers over settled property

In the case of Melville V IRC [2000] STC 628 the Court had to consider the question of whether the statutory definition of ‘property’ in IHTA84/S272 as including ‘rights and interests of any description’ needed to be interpreted in any different way in view of the opening words of the section ‘except where the context otherwise requires’. The decision in favour of the taxpayers, upheld by the Appeal Court in July 2001, was that it did not.

In that case, the settlor of a discretionary trust had a general power, exercisable by deed during his life at any time commencing three months after the settlement date, to direct the trustees to exercise their dispositive powers in such a manner as he should specify, including the transfer of the whole fund back to himself outright.

Therefore, if this power was property within the meaning of IHTA84/S272, its value had to be taken into account in computing the loss to the transferor’s estate (IHTM04054) under IHTA84/S3 (1) on creating the trust. Because the only circumstances which could have prevented the exercise of the power would have been the settlor’s death before the three month period had expired, the value of the settlor’s power from the outset was very nearly equal to the value of the property settled, which was many millions of pounds. In other words, the value of his estate after the settlement had been made was little less than it had been, a few thousand pounds representing the actuarial risk and the loss of use of the assets for three months. The chargeable transfer was therefore well within the nil-rate band.

Whilst the decision was successful for the taxpayers in bringing into play hold-over provisions for Capital Gains Tax, it had other consequences for Inheritance Tax in general. For instance, could a double charge arise on the death of a life tenant with a general power of appointment (or equivalent power), namely a charge to tax on the power itself as part of the free estate,and to an equal charge on the trust assets under IHTA84/S49 (1)?

To correct the situation Finance Act 2002/S119 amended IHTA84/S272 and excluded a settlement power from the definition of property in the Inheritance Tax Act 1984. This change applies not only for transfers of value after 16 April 2002 but is also deemed to apply to transfers of value before that date. A ‘settlement power’ is broadly defined in IHTA84/S47A as any power over, or exercisable (whether directly or indirectly) in relation to, settlement property or a settlement.