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Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Monthly Tax Review, highlights an unexpected and controversial HMRC view on interests in possession.

Matthew Hutton

Context: the legislation

IHTA 1984, s 53 is headed ‘exceptions from charge under s 52’, viz charge on termination of interest in possession (IIP).

Section 53(2) provides that tax shall not be chargeable under s 52 (except in the case mentioned in sub-s 52(4)(b)) if the person whose interest in the property comes to an end becomes on the same occasion beneficially entitled to the property or to another interest in possession in the property.

Section 52(4)(b) provides that if the value of the property (or part) to which or to an interest in which a person becomes entitled as mentioned in s 53(2) is less than the value on which tax would be chargeable apart from that sub-section, tax shall be chargeable on a value equal to the difference.

Section 53(2A), REPLACE ed by FA 2006, provides that, where:

(a) a person becomes beneficially entitled on or after 22 March 2006 to an interest in possession in settled property, and

(b) the interest is not a disabled person’s interest,

sub-s 53(2) applies in relation to the coming to an end of the interest with the omission of the words ‘or to another interest in possession in the property’.

STEP warning

HMRC have recently written to a number of firms expressing the view that where a pre-22 March 2006 life interest comes to an end and is replaced, before 6 April 2008, by a transitional serial interest (TSI) in favour of the same life tenant, the provisions of IHTA 1984, s 53(2A) should be read as meaning that an immediately chargeable transfer occurs on that occasion, so that relief under IHTA 1984, s 53(2) is not available.  It would seem that if this view is correct, such a charge would also arise on the creation of other (non-TSI) interests in possession for the pre-22 March 2006 life tenant.  This issue is being raised with HMRC as a matter of urgency, as this view does not appear to be correct and is inconsistent with the response which HMRC gave to question 6 of the memorandum of 43 Questions put to HMRC on Schedule 20 by STEP and CIOT.

Pending clarification, therefore, advisers will need to consider carefully whether or not they create TSIs or other interests in possession in favour of pre-22 March 2006 life tenants.

(Email sent by STEP to its members 24 September 2007)

The answer to the conundrum (as supplied by Chris Jarman)

The question concerns the interpretation of the FA 2006 amendments.  Chris Jarman of 13 Old Square has said on the Trusts Discussion Forum that HMRCs view is ‘downright wrong’.  His analysis is as follows:

Section 53(2A) disapplies s 53(2) in relation to the replacement of one IIP with another for the same beneficiary only where the IIP which comes to an end is one to which that beneficiary became entitled on or after 22 March 2006.  The disapplication is ‘in relation to the coming to an end of the interest’; syntactically ‘the interest’ (as in s 53(2A)(b)) can only be a reference to the interest referred to in s 53(2A)(a), namely the one to which the person became beneficially entitled on or after that date.

As pointed out in para 5.22 of Chris’ ‘IHT Trusts Alignment: A Guide to the New Regime’, so long as it is a pre-2006 IIP which is coming to an end and is being replaced by a fresh IIP for the same beneficiary, s 53(2) will continue to apply in its original form even beyond 5 April 2008, and thus even though the trust will in most cases enter the relevant property regime as a result.  Similarly, if the switch takes place during the transitional period but the trust then enters the relevant property regime because the property does not remain within the same settlement (assuming no challenge to HMRC's opinion that it must stay within the same settlement in order to qualify for TSI status).

(Trusts Discussion Forum, posting by Chris Jarman on 21 September 2007)

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