Section 52: Reversionary Interests of Purchaser Or Settlor Etc in Relevant Property
Summary
1.Section 52 provides that where a person transfers property into a trust in which they or their spouse or civil partner retains a future interest, or where a person purchases a future interest in a trust, then there will be inheritance tax (IHT) charges when that future interest comes to an end and they take their actual interest.
Details of the Section
2.Subsection (1) inserts new section 81A into the Inheritance Tax Act 1984 (IHTA):
New section 81A(1) provides for there to be a disposition for IHT purposes where a reversionary interest (which is defined in section 47 of IHTA as a future interest in a trust) in relevant property comes to an end and the person takes the actual interest where that person:
purchased the reversionary interest; or
where the person who is entitled to the reversionary interest is the settlor or the spouse or civil partner of the settlor of the trust.
New section 81A(2) provides that where a reversionary interest defined in new section 81A(1) is given away it will not be a potentially exempt transfer.
3.Subsection (2) provides for these changes to have effect for reversionary interests to which a person has become entitled in the circumstances specified in new section 81A on or after 9 December 2009.
Background Note
4.Reversionary interests, as defined in section 47 of IHTA, are not generally treated as part of a person’s IHT estate, but section 48(1) of IHTA provides for certain exceptions to that rule.
5.IHT charges arise on relevant property:
at 20 per cent on assets put into trust which exceed the IHT nil rate band (with a further charge of up to 20 per cent if the person dies within seven years of making the transfer);
at 6 per cent every ten years on the value of the trust assets over the nil rate band (the “periodic charge”); and
an “exit charge” when funds are taken out of trust between ten-year anniversaries at a rate based on the time since the last “periodic charge”.
6.HM Revenue & Customs (HMRC) became aware of arrangements that sought to avoid any IHT charges on assets that are put into a trust. The arrangement was designed to exploit the rules that treat certain reversionary interests as part of a person’s estate in order to reduce the entry charge where assets are put in to trust.
7.This section provides that where certain reversionary interests that are treated as part of a person’s estate come to an end and that person takes their actual interest in the relevant property trust then there is a deemed disposition for IHT purposes. This means that there is a transfer of value and IHT will be charged based on the value of the reversionary interest immediately before it came to an end. To prevent these charges being avoided by a person gifting their reversionary interest to another person, such a transfer will be an immediately chargeable IHT event.
8.These changes affect only reversionary interests in relevant property. They do not affect certain interests in possession which are not included as part of the relevant property regime (for example, a disabled person’s interest).
