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HMRC internal manual

Inheritance Tax Manual

Downsizing: Disposals: Qualifying former residential interest: Interest in possession trust

The IHT definition of estate (IHTM46012) includes all the property to which a person is beneficially entitled, so it includes property in which the person has a qualifying interest in possession (QIIP) (IHTM16060). If the person has a QIIP in a dwelling-house that they have occupied as their residence while the property was in their estate, this is a ‘residential property interest’

IHTA84/S8H, which defines a QFRI (IHTM46053), requires the disposal to be by the person who has subsequently died. But where property is in a trust, it would usually be the trustees who made any disposal.

IHTA84/S8HA addresses this point by treating the disposal by trustees in those circumstances as a disposal by the deceased. In particular, it applies where a person (the beneficiary) has a QIIP in settled property which consists of or includes an interest in a dwelling-house as his residence.

Where the trustees of the settlement dispose of the interest in the dwelling-house to someone other than the beneficiary, or there is the coming to an end of the beneficiary’s interest in their lifetime, this will be treated as a disposal by the beneficiary for the purposes of RNRB, if:

  • The person’s interest in possession subsisted throughout the period from the time he became beneficially entitled to it up to the time of disposal, and
  • The interest in the dwelling-house is, or is part of, the settled property immediately before the disposal.

There are separate provisions for situations where the person had more than one dwelling-house that was a ‘residential interest’ (IHTA84/S8H(4A, 4B, 4C)). (IHTM46053)

In each case the property interest disposed of is limited to the extent of the deceased’s interest in possession.

In practice the following would qualify as disposals by the deceased:

  • the trustees selling a dwelling-house in the trust and buying a less valuable one;
  • the trustees selling a dwelling-house in the trust and not replacing it.
  • the trustees bringing the deceased’s interest in possession in a trust which includes a dwelling-house to an end in the deceased’s lifetime;
  • the deceased bringing their interest in possession in a trust which included a dwelling-house to an end during their lifetime.