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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Settled property exemptions: restrictions when a reversionary interest is acquired

Terminations of interests in possession in settled property offered too much scope for using exemptions as part of tax - avoidance schemes. So the anti - avoidance provisions of IHTA84/S55 and IHTA84/S56 deny exemption in the cases shown below.

The restriction in these provisions does not apply where the interest was acquired before 16 April 1976 in any case, but in some cases a later date of acquisition is specified (see below). The relevant date is always the date on which the interest was acquired.

IHTA84/S55 provides that if a person who has an interest in settled property (whether in possession or not) acquires a reversionary interest expectant (whether immediately or not) on that interest, the reversionary interest is not part of his estate for IHT purposes.

This does not mean that the reversionary interest is not ‘excluded property’ but it has other effects:

  • it cannot be counted as part of a transferee’s estate immediately before his death, and
  • the transfer of it by the life tenant/acquirer cannot reduce the value of his estate or be a transfer of value.

Under IHTA84/S55 (2) the purchase of such a reversion by the person having an interest (in possession or not)

  • is not covered by IHTA84/S10 [‘purchase’ exemption]
  • is a disposition causing a loss to his estate, because the purchase consideration is leaving his estate and nothing is becoming held in his estate in exchange [as the reversion is not part of his estate - S55 (1)] and
  • where the disposition is made prior to 17 March 1987, the disposition is not a PET (IHTM04057) - it is an immediately chargeable (IHTM04067) transfer. But this does not apply where where the disposition was made on or after that date as the restriction was removed by  F(No2)A87/S96(1) which deleted the words ‘and such disposition is not a potentially exempt transfer’. 

The exemptions referred to in IHTA84/S56 are those that may be available in the case of an interest in possession ceasing -

  • IHTA84/S18 - Spouse or civil partner (IHTM11032)
  • IHTA84/S24 - Political parties
  • IHTA84/S26 - Public benefit
  • IHTA84/S23 - Charity without limit of time
  • IHTA84/S25 - National purposes
  • IHTA84/S27 - Maintenance Funds

Under IHTA84/S56 (1) exemption under these sections shall not apply in relation to property which is given in consideration of the transfer of a reversionary interest, if by virtue of IHTA84/S55 (1) that interest does not form part of the estate of the person acquiring it.

IHTA84/S56 (2) - Where a person acquires a reversionary interest in any settled property for a consideration in money or money’s worth s18 shall not apply in relation to the property when it becomes the property of that person on the termination of the interest on which the reversion is expectant.

IHTA84/S56 (3) - exemption under sections 23 to 27 shall not apply to any property if -

  • the property is an interest in possession in settled property and the settlement does not come to an end in relation to that settled property on the making of the transfer, or
  • immediately before the time when it becomes the property of the exempt body it is comprised in a settlement and, at or before that time, an interest under the settlement is or has been acquired for a consideration in money or money’s worth by that or another exempt body.

IHTA84/S56 (4) defines exempt body.

IHTA84/S56 (5) For the purposes of sub sections (2) and (3) above, a person shall be treated as acquiring an interest for a consideration in money or money’s worth if he becomes entitled to it as a result of transactions which include a disposition for such consideration (whether to him or another) of that interest or of other property.

IHTA84/S56 (6) - loans by one person to another are not caught by S56.

IHTA84/S56 (7) - subsection (2) above shall not apply where the reversion was acquired before 16 April 1976.

Where the acquisition was on or after that date but before 12 April 1978 then IHTA84/S56 (2) applies amending ‘S18 above’ to read ‘S18 and S23 to S26 above’, and adding the word ‘person’ so that it reads, ‘person or body’.

IHTA84/S56 (8) SS3 (b) (exempt bodies) shall not apply to acquisitions before 12 April 1978 and S56(5) shall not apply where the person concerned became entitled to the interest before 12 April 1978.