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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Interests in possession: introduction

For Inheritance Tax purposes there is an important distinction between:

  • settlements in which there is a qualifying interest in possession (IHTM16062) and
  • settlements in which there is no qualifying interest in possession.

Normally, the interests of the beneficiaries under these two types of settlements are taxed under different provisions of the IHTA84.

From 22 March 2006 onwards, following changes in the Finance Act 2006, there can be only three types of new qualifying interest in possession (IHTM16062). All other interest in possession settlements created after this date will be non-qualifying and will be chargeable to Inheritance Tax as ‘relevant property’ (IHTM42161) unless they meet the conditions for:

These trusts are subject to their own charging regimes under IHTA84/S71B and IHTA84/S71E-G respectively.

It is possible for funds to be held on both qualifying interest in possession trusts and non-qualifying interest in possession or relevant property trusts to exist under the same settlement at the same time.

From an Inheritance Tax point of view, we are interested in the rights of the beneficiaries under the provisions of that settlement.

The meaning of interest in possession and non-interest in possession was clarified and explained by the House of Lords in Pearson v IRC [1981] AC 753