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HMRC internal manual

Inheritance Tax Manual

Pre-owned assets: avoidance of double charges: election that reservation of benefit provisions should apply

The Inheritance Tax (Double Charges Regulations) 1987 SI1987/1130 (IHTM14691) provide relief in certain circumstances where a reservation of benefit (IHTM14301) exists in property given away. The terms of these regulations are very precise and would not apply to a home loan or double trust scheme (IHTM44103) where an election (IHTM44070) is made - as the election will apply to the house that was sold to the first trust whereas it was the debt that was given away.

Consequently, The Charge to Income Tax by Reference to Enjoyment of Property Previously Owned Regulations SI2005/724 at Article 6 contain specific relief for a double charge where a person makes a gift representing the proceeds of the disposal of relevant property by virtue of which the property becomes comprised in a settlement and subsequently makes an election into Inheritance Tax.

Should the person die within 7 years of the transfer, a charge will arise on the failed PET and on the property subject to the election. Article 6 then operates in the same way as the 1987 regulations and whichever charge gives rise to the higher overall amount of tax is taken and the other charge is reduced to nil.

The regulation only applies to home loan schemes that are not already caught by the normal operation of the reservation of benefit rules. Its terms are very precise and only apply where the gift of the debt representing the disposal proceeds is to a second trust - although very unusual, a second trust is not strictly required.