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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Interests in possession: what happens if consideration is given

IHTA84/S49 (2) provides an important exception to the rule in S49 (1):

  • where a person becomes entitled to an interest in possession in settled property as a result of a disposition for a consideration in money or money’s worth, any question whether and to what extent the giving of the consideration is a transfer of value or chargeable transfer shall be determined without regard to S49 (1).

This provision is a necessary barrier to prevent any tax advantage by manipulation of the ‘real’ value and the S49 (1) basis of valuation.

For example, if the buyer pays £1,000,000 for a life interest in a £1,000,000 fund, when the life tenant is 50 years old and the life interest is ‘really’ worth, say, £500,000 on an actuarial basis, the buyer will fall foul of S49 (2) and the consideration given will be viewed in ‘real world’ terms, i.e. the buyer has made a gift of £500,000.

So far as the seller is concerned IHTA84/52 (2) applies so that there is no charge as the IHT value (£1M) is reduced by the amount of the consideration (£1M).