Interests in possession: addition of settled property or value: additions of property after 22 March 2006
It is very important to recognise that the 2006 legislation does not affect the nature of a settlement or of settled property. Neither does it affect the nature of an interest in possession. But the effect of both the earlier and the 2006 legislation is that each sets out how particular settled property is to be treated for Inheritance Tax. If the fund comprises property settled by dispositions both before and after 22 March 2006, the earlier legislation applies to the property that was settled earlier and the 2006 legislation to the property that was settled later.
You should start by considering the terms of IHTA84/S49. Start by asking:
- Is the person beneficially entitled to an interest in possession in settled property?
- Did they become entitled to that interest in possession in the settled property before or after 22 March 2006?
You should not take the view that ‘property then comprised in the settlement’ means only the particular assets comprised in the settlement immediately before 22 March 2006. Instead you should approach it on the basis that it means the settled property that was then in the trust and any assets that are derived from or represent that property.
The end result is that:
- a person who holds an interest in possession in property that was settled before 22 March 2006 is treated as if they owned the settled property.
- but, a person who holds an interest in possession in property settled on or after 22 March 2006 is not generally treated as owning it; and that property will (unless the trust qualifies as a favoured trust (IHTM16061)) be relevant property.
In 2003 Stephen settled Moor Place on Linda for life. In 2008 Stephen added Moor Place Lodge to the same settlement and instructed the trustees to administer the two properties as separate funds.
Linda would be treated as beneficially entitled to Moor Place and Inheritance Tax would be charged on the property as though Linda owned it.
But Moor Place Lodge is relevant property. It was not property in which Linda had an interest in possession before 22 March 2006 and did not represent such property.
However, matters may not always be so straightforward. Suppose the same facts but instead of two properties, the settlement had contained a number of stocks and shares to which more had been added.
Where the trustees have maintained separate funds, one for the stocks and shares held by the trustees before the addition and another for those added, the value of each fund will be clear. But, where the stocks and shares had been mixed, some form of apportionment will be needed when future tax charges arise. Each fund would have to be valued on the normal open market basis at the date it was added in 2008. If the original and added funds were then worth £2m and £1m respectively, one-third of the whole in 2013 would represent relevant property and would be subject to the ten-year charge (IHTM42081).
Provided any apportionment put forward by the taxpayer is fair and reasonable, you should not spend time trying to arrive at a precise split in value between the funds.