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HMRC internal manual

Inheritance Tax Manual

Pre-owned assets: specific avoidance schemes: land - settlement on interest in possession trusts

This scheme, known as an ‘Eversden’ scheme, involved a spouse putting their marital home into a trust under which the other spouse had a life interest. It could also operate where spouses owned property jointly and they each settled their share of the property on each other. The transaction is exempt from Inheritance Tax (IHTM11031) and excluded from the reservation of benefit provisions (IHTM14318). The life interest(s) are then terminated in most of the fund so that each spouse is treated as making a transfer at that later time. The termination of the life interest meant that the spouse(s) make a PET (IHTM04084); but it was not a gift so that it was not caught by the reservation of benefit provisions (IHTM14301). The spouses continued to occupy the property through their life interests in the parts of the property retained by the trustees.

HMRC challenged the scheme and lost in the case of Eversden v IRC [2003] STC 822. Consequently, legislation was introduced with effect from 20 June 2003 to reverse the decision (IHTM14318). The impact of this legislation on the POA charge is as follows

  • where the scheme was effected on or after 20 June 2003, the property will be subject to a reservation of benefit for Inheritance Tax purposes by reason of FA86/S102(5A). As a result the exemption under FA04/Sch15/Para11(3) will apply to the settlor (IHTM44044). There may be a separate reservation of benefit when the spouse’s interest in possession terminates and which is treated as a gift under FA86/S102ZA (IHTM14391).
  • where the scheme was effected before 20 June 2003, the arrangement succeeds in avoiding the reservation of benefit provisions. However, provided the spouse’s life interest continues until their death, there will be no POA charge because the transaction is an excluded transaction under FA04/Sch15/Para(10)(1)(c) (IHTM44032),
  • if, however, the spouse’s life interest comes to an end during their lifetime, the transaction will not longer be an excluded transaction by virtue of FA04/Sch15/Para10(3) so the POA charge will arise from that point on the settlor, assuming the settlor occupies of the property. If the spouse’s qualifying interest in possession ends after 18 March 2006, she may also be subject to a separate inheritance tax charge on her death under FA86/S102ZA if she still benefits from the property. But as she did not, herself, disposed of this interest in the property, she is not subject to the POA charge.

Where the scheme is subject to the POA charge, the value subject to the charge will be calculated in accordance with FA04/Sch15/Para4(2) (IHTM44010). You will need to obtain three values to correctly assess the POA charge

  • the rental value (R), say, £25,000,
  • the value at the valuation date (IHTM44011) of the interest that was disposed of (DV); if each spouse has disposed of a half share in the property, that will be value of that share, say, £360,000, and
  • the value of the property at the valuation date (V), say, £800,000.

Following the formula at IHTM44010, the amount subject to the POA charge is

25,000 × 360,000 ÷ 800,000 = £11,250.

Note that there is nothing comparable to the Inheritance Tax related property provisions (IHTM09731) in FA04/Sch15, so that the value of a share of property will be subject to an appropriate discount, even if the other joint owner was the spouse and both have made transfers of their entire interests in the property.