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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Foreign property: property excluded from Inheritance Tax: reversionary interests

IHTA84/S47 - a reversionary (IHTM04281) interest means any future interest under a settlement. Such an interest is usually excluded from Inheritance Tax subject to certain exceptions (IHTM04286)

A reversionary interest is an item of property, separate from the property in which the interest subsists.

Unless the interest is excluded by the main provision in IHTA84/S48 (1), a reversionary interest that is itself situated outside the UK should be treated as follows:

  • IHTA84/S6 (1), - an unsettled reversion will be excluded property if the transferor is domiciled abroad
  • IHTA84/S48 (3), - a reversion which is itself comprised in a settlement will be excluded if the settlor of the reversion was domiciled abroad when the reversion was settled.

The situs or locality of a reversionary interest will normally be determined by the residence of the trustee(s) of the property in which the interest relates.

Unsettled reversion, Example 1

Anna transfers £100,000 to trustees in Spain on trust for Barry for life with remainder to her husband Derek. Some years later, while Barry is alive, Derek dies domiciled in Spain and bequeaths all his estate (including his reversionary interest under Anna’s settlement) to his son Callum.

On Derek’s death the reversion is not excluded from his estate by IHTA84/S48 (1) because he is the settlor’s spouse. But the exclusion provided by IHTA84/S6 (1) applies as both the locality and Derek’s domicile are outside the UK.

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Settled reversion, Example 2

The facts are as Example 1 and Callum sells the inherited reversion to Edward. Edward, who is also domiciled in Spain, immediately puts the purchased reversion into discretionary trusts.

The reversion that is now in Edwards’s settlement is excluded property in view of Edward’s foreign domicile and the overseas residence of the trustees of Anna’s settlement, as long as it remains a reversionary interest. This is the case even though it was purchased by the settlor and is therefore outside the protection of IHTA84/S48 (1).