Pre-owned assets: exemptions: examples where relevant property remains part of the Inheritance Tax estate
In 2005, Brian transfers his house to an interest in possession trust with a life interest for himself and then for his wife, Julie, with remainders to his children. Brian continues to occupy the house. The disposal condition (IHTM44004) is met and none of the exclusions (IHTM44030) apply.
The property continues to form part of Brian’s estate under IHTA84/S5(1) and so is exempt from the POA charge under FA04/Sch15/Para11(1) whilst his interest in possession exists.
Note that exemption still applies even though on Brian’s death, the property is exempt from Inheritance Tax as the life interest passes to Julie. However, should the trustees bring Brian’s life interest to an end during his lifetime, the charge under FA04/Sch15/Para3(2) will apply unless Brian ceases to occupy the property, another exemption applies or he becomes absolutely entitled to the property.
If the trustees brought Brian’s life interest to an end after 22 March 2006, he will be treated as making a PET under IHTA84/S52(1); but - assuming he continues to occupy the property - he will also be treated as reserving a benefit (IHTM14391) in the property in which his life interest ceased by virtue of FA86/S102ZA(2). Because Brian is treated as reserving a benefit in the property, he continues to be exempt from the POA charge, but under a different exemption (IHTM44044).
If, in the example above, Brian had made the transfer in 2009, the position would have been quite different, as outlined below.
The transfer into the trust is an immediately chargeable transfer (IHTM04067) and tax would be payable at 20% if the value transferred exceeded the nil-rate band. The trust will also be subject to the normal relevant property trust charges (IHTM42070). Brian’s interest in possession is not part of his estate, so the exemption under FA04/Sch15/Para11(1) (IHTM44041) does not apply. The POA charge will therefore apply, unless Brian reserves a benefit in the property when a different exemption will apply.
Brian has made a gift of land to the trust, so the provisions of FA86/S102A (IHTM14360) must be considered. If Brian has retained a significant right or interest that entitles him to occupy the land, he will be treated as reserving a benefit in the property, FA86/S102A(2). Although the property does not form part of Brian’s estate for Inheritance Tax purposes, his interest under the trust does entitle him to occupy the property and so he will be exempt from the POA charge under FA04/Sch15/Para11(5) (IHTM44044).