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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Leases for life: introduction

At general law, a lease granted at low rent or no rent and linked to the length of a life would not give an interest in possession to the tenant. But the benefit to the tenant in such a case is obvious, and the benefits seem similar to those enjoyed by a person having an interest in possession.

Accordingly, IHTA84/S43 (3) provides that four kinds of lease are treated as settlements:

  • a lease for life or lives:
  • a lease which is terminable on a death
  • a lease for a period ascertainable only by reference to a death
  • a lease terminable at a date ascertainable only by reference to a death

Where a lease is treated as a settlement under S43 (3), the settled property is that in which the lease subsists, e.g. a house etc. and it is taxed like any other settled property.

The life in question need not be the tenant’s.

S43 (3) also provides that where a lease which was not granted as a lease at a commercial rent is at any time to become a lease at an increased rent it shall be treated as terminable at that time. The effect of this is that if the rent can be increased on the death of the lessee, the lease will be treated as terminable on his death and thus within S43 (3).

The lessor’s interest is, in part, a reversionary interest. It is not excluded property in view of IHTA84/S48 (1)(c). Accordingly its value is part of his taxablee state. However, if no consideration was given the whole of the value is included in the lessee’s estate ( IHTA84/S170).

A statutory tenancy is not regarded as a lease for life, even though its practical effect is much the same.

Under Scots Law one of the four cardinal elements of a lease is that there has to be an agreed rent. If there is no agreed rent or it is agreed that there is no rent payable then the lease is invalid.