Reverter to settlor: on death of life tenant
If the life tenant dies while the settlor is still living and the interest in possession reverts to the settlor on the life tenant’s death, the value of the trust property is left out of account in determining the value of the life tenant’s estate for IHT purposes - IHTA84/S54 (1)
Similarly where the interest reverts to a living spouse or civil partner (IHTM11032) of the settlor, or the settlor’s widow, widower or surviving civil partner where the settlor has died less than two years earlier, and the spouse, widow or widower or surviving civil partner is domiciled in the United Kingdom, the value is left out of account - S54 (2).
Where the interest in possession arose on or after 22 March 2006, S54(1) or S54(2) will only apply if it is:
- a disabled person’s interest, or
- a transitional serial interest, S54(2A)
The settlor must be living at the time the property reverts.
The property need not revert to the settlor absolutely - the exemption applies if the settlor takes an interest in possession.
The value of an interest in possession will also be left out of account in determining the value of a person’s estate if:
- The person (“B”) became beneficially entitled to the interest on or after 22 March 2006
- The interest was an immediate post-death interest throughout the period beginning when B became beneficially entitled to it and ending with B’s death,
- The settlor died before B but less than two years earlier, and
- On B’s death, the settlers widow, widower or surviving civil partner becomes beneficially entitled to the settled property and is domiciled in the United Kingdom, IHTA84/S54(2B)
For the purposes of this section, where it cannot be known which of two or more persons who have died survived the other or others they shall be deemed to have died at the same instant - S54 (4).
There is also an exemption for reverter to settlor in the life tenant’s lifetime at IHTM16122.
Pre-owned assets and reverter-to-settlor trusts
Schedule 15 Finance Act 2004 introduced an income tax charge on pre-owned assets (POA). It was designed to stop people avoiding IHT on valuable assets like the family home while continuing to benefit from using them. It achieved this by imposing an annual income tax charge on the benefit of using the asset(s). As an alternative to the POA income tax charge, people can elect instead that the asset(s) in question will be treated for IHT purposes as if it were subject to a reservation (IHTM04072).
Where the former owner continued to enjoy the asset(s) as the beneficiary of a reverter-to-settlor trust, it was possible to obtain the benefit of the reverter-to-settlor exemption and avoid either the POA or GWR charges, as appropriate. Legislation introduced in Finance Act 2006 imposed an income tax charge in such circumstances with effect from 5 December 2005. The beneficiary can still elect that the POA income tax should not apply. But the effect of an election will not be to deem the asset(s) to be subject to a reservation. Instead, the reverter-to-settlor exemptions in S53(3) and (4) (IHTM16122) and S54 IHTA will not apply to the actual interest in possession.
Detailed guidance about POA can be found at IHTM44000 onwards.