Inheritance Tax: Interests in possession - post Finance Act 2006
The new trust regime introduced by the Finance Act 2006 made a number of fundamental changes to the Inheritance Tax treatment of trusts. Where a person becomes beneficially entitled to an interest in possession in settled property on or after 22 March 2006, the interest will only be treated as forming part of their estate for IHT purposes if it is one of the following:
- An immediate post death interest
- A disabled person’s interest
- A transitional serial interest
Such interests, together with beneficial interests in possession to which an individual became entitled before 22 March 2006, are known as ‘qualifying interests in possession’ (s.59(1) IHTA 1984). Subject to certain special cases, settled property in which no qualifying interest in possession subsists is known as ‘relevant property’ for IHTA purposes. The detailed instructions in the Inheritance Tax manual at IHTM16061 onwards should be consulted as necessary.
Where, after 22 March 2006, settled property in which an interest in possession subsists is treated as forming a part of the estate because it is not relevant property, unquoted shares included in the settled property are aggregated with other holdings in the estate for valuation purposes. (See example 1 below).
A has a life interest that is not relevant property, in 150 shares of NQ Ltd and there are a further 200 shares in his free estate. On his death a valuation of 350 shares is required. If he has made a chargeable lifetime transfer of 100 shares out of his free estate holding (or a PET which becomes chargeable as a result of his death within seven years), the loss to the estate principle would apply and the valuations required would have been
- before the transfer - 350 shares
- after the transfer - 250 shares
and the value transferred would be the difference between the two values.
If however A’s interest in possession comes to an end in his lifetime, for example by the release of the whole or part of his life interest, the loss to the estate principle does not apply. (See example 2 below).
The facts are as at Example 1. A releases a life interest that is not relevant property, in 50 shares. A valuation is required of 50 shares as part of a holding of 150 shares (not as part of 350).
Note that in these circumstances, however, business relief, agricultural relief and instalment questions are nevertheless determined by reference to the total holding in A’s estate before the release, in other words 350 shares in this example. (See Chapter 111 of this manual SVM111000 and Chapter 4 of the Inheritance Tax Manual IHTM04094). The IHT caseworker should note on the Val 70 [Lifetime] whether the transfer is out of property held in an interest in possession trust, in other words whether their claim arises under ss.51-52 IHTA, and state that the interest is a qualifying interest in possession.
|Additional Guidance: SVM150000|