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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Reversions: purchased or mortgaged reversions

Relief under IHTA84/SCH6/para3 (1) is available on reversions purchased or mortgaged for full consideration in money or money’s worth before 27 March 1974.

Where the original purchase of the reversion was exempt by reason of purchase for full consideration - FA1894/S3 - then the Estate Duty would have been nil. Accordingly, the taxpayable on the death of the life tenant remains at nil, because of IHTA84/SCH6/para3 (1).

There is no relief for partial consideration.

Form of the relief

In practice we do not think of a reversioner ‘paying’ the tax. It might be simpler to think of the reversioner ‘suffering’ the tax on the life tenant’s death, because what the reversioner takes is the fund less the ordinary IHT payable on the life interest.

The relief takes the form that ‘no greater amount of tax shall be payable by the purchaser or mortgagee’ on the death of the life tenant than would have been payable by the purchaser if none of the provisions of Finance Act 1975 or this Act had been passed - i.e. on an Estate Duty basis.

The life interest must be considered under Estate Duty law as a whole. The claim on a life interest prior to FA75 arose under FA1894/S2 (1)(b)(i) as added by FA69. This claim is the same as an IHT claim on an interest in possession.

The taxpayer may choose which basis to apply.

It is very unlikely that this relief will be worthwhile to the taxpayer (if full exemption or relief was not due on the original event) simply because rates of tax are much lower for CTT/IHT than they were prior to FA75.

A brief calculation will show that an Estate Duty basis - where the highest-ever nil rate band was £15,000 - cannot produce a lower amount payable than an IHT calculation based on nil rate bands up to £255,000. However, as all the law of Estate Duty is to be applied [and not merely Estate Duty rates] there will be cases where a specific relief or exemption is available under the Estate Duty provisions.

For example, if foreign immovable property was settled in 1955 and the life tenant dies in 1995, the Estate Duty basis would give total exemption because such property was not subject to Estate Duty in these circumstances until 1962.

Such cases of specific Estate Duty relief/exemption will be rare.

If anything more than a brief comparison of the Estate Duty and IHT outcomes is required, note that, under the E.D. rules gifts within seven years of the deceased’s death are aggregated with the death estate and not cumulated.

Successors in title

In practice, the relief is given to successors in title so that, if the purchaser settles the reversion the relief is available to the trustees of that settlement (although they are not themselves purchasers).

The relief has no bearing on the death of the purchaser or a successor in title. The event which brings the interest into possession is the only relevant event.

Lifetime transfers

A chargeable transfer by the purchaser in his lifetime is not entitled to the relief (because it is not ‘falling into possession’ as above). It is not excluded property because of IHTA84/S48 (1)(a).

For example, on an assignment of the purchased reversion to trustees of a settlement as above, the actuarial value of the reversion is taxable and no reliefs apply.

As the reversion is purchased it is not excluded property in the purchaser’s estate, so that it is taxable on his death as part of his free estate.

Close companies

Where the sale of the reversion was to a close company in which the person entitled to the reversion was a participator, IHTA84/SCH6/para3 (2) provides that the relief under para3(1) shall apply only to the extent that other persons had rights and interests in the company and this sub section to be treated as within IHTA84/PartIV.(see IHTM16243).

This prevents the relief being given where the reversioner has in effect sold the property to himself because he is the only person behind the company.

Repayments

See IHTM30375 in relation to interest on any repayment.