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HMRC internal manual

Inheritance Tax Manual

Interests in possession: the effects of S49 and S49(1A)

Whether an interest in possession exists on the facts of any given case is a matter for careful analysis and thought. The question was once sufficiently difficult to concern the House of Lords in the Pearson case, which is the leading case on the subject.

Once it is established that an interest in possession exists in a fund, it is a relatively simple matter to identify what capital is chargeable and how it becomes so.

IHTA84/S49 (1) provides:

‘a person beneficially entitled to an interest in possession shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists.’

However, where the person becomes beneficially entitled after 22 March 2006 S49(1) applies only if it is an immediate post death interest, a disabled person’s interest or a transitional serial interest, IHTA84/S49 (1A).

The effect of IHTA84/S49 is that for all practical IHT purposes - and especially on valuation matters - the person having the interest in possession is treated as the absolute owner of the property.

The fact that the value of the life interest of a 90-year-old is less than that of a 26-year- old is completely removed and ignored.

As IHTA84/S49 (1) attaches all of the value to the current interest in possession, any interests in the future, called reversionary interests, are usually treated as excluded from an individual’s estate on death by virtue of IHTA84/S48. (IHTM16232)