Interest in possession trust - two beneficiaries with right of occupation

Trusts Discussion
1

I am currently dealing with an estate where the second of two beneficiaries with a right of occupation has died. The Will gave a right of occupation to two adult children. Testator died 24th July 1993 and the Will is dated 22nd April 1977. The first beneficiary died in 14th May 2020. The second beneficiary continued to live in the property and died on 26th March 2025. My research confirms that the assumption is that, whilst they are both alive, they benefit 50/50 and 50% of the value of the property will aggregate to the estate of the first beneficiary to die. I am seeking advice on the percentage of the property which is to be aggregated to the estate of the second beneficiary to die - is this 50% or 100%? Below is the relevant section of IHTA 1984

IHTA 1984 s50 (5) Where the person referred to in section 49(1) above is not entitled to any income of the property but is entitled, jointly or in common with one or more other persons, to the use and enjoyment of the property, his interest shall be taken to subsist in such part of the property as corresponds to the proportion which the annual value of his interest bears to the aggregate of the annual values of his interest and that or those of the other or others.

Thank you in anticipation of receiving some clarification!

2

IHTM16102-3 sets out HMRC practice. The curious annual value wording is just to rule out a discount for a QIIP termination in a part interest.

You do not say exactly what happened to the capital on the occasion of the first death. Unless the share of the remaindermen then vested in possession the charge on the second death is on 100% of the value of the property. Because the first death was more than 4 years before the second but less than 5 years quick succession relief is due at 20% of the IHT charged on the first death so far as attributable to the 50% interest then charged, since that has fully increased the second chargeable estate. The amount of relief cannot exceed the tax chargeable on the second death so far as attributable to the QIIP value.

See IHTM22041-81 but especially 22091-3 and it is a pity that the example in the last of these is so complex, including partial lifetime terminations; it surely should have included a straightforward example, like your case, of one death followed by another.

Jack Harper

3

An underlying factor, as Jack has flagged is whether, on the death of the first beneficiary in 2020 the interest in remainder vested in possession.

Based on my reading of the original post, the right of occupancy would appear to be a joint life interest.

At the time of the testator’s death (1993), the children’s interests would have been qualifying interests in possession (QIIP), aggregating with their own estates on death.

However, by the time the first beneficiary died (2020), the IHT changes brought in by the Finance Act 2006 applied. Accordingly, the right of occupancy accruing to the surviving beneficiary could not be a QIIP, as the requirements for there to be a transitional serial interest are not met.

In consequence, with effect from the death of the first beneficiary, the surviving beneficiary only had a QIIP in a half share of the property (their original IIP), and a non-qualifying IIP in the other half of the property, which is relevant property subject to ss.58-85 IHTA 1984.

A proportionate periodic charge would have applied in respect of the non-qualifying IIP in2023, and on the death of the surviving beneficiary there is an exit charge.

Curiously, in this scenario, the effect of the 2006 IHT changes is usually to reduce the overall IHT liability than would have arisen if the whole of the property ha remained subject to a qualifying IIP!

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

4

The two beneficiaries surely each had a pre-22 March 2006 QIIP in the whole of the settled property. After the first death the survivor did not acquire a different IIP. It was originally a QIIP in the entirety and remained such. Joint life tenants are not like joint owners of unsettled property. The survivor of a joint life tenant inherits nothing in the real world so it requires very clear words in the statute to work that miracle.

The fictional deeming provision of s49 (1) is an artificial construct for IHT alone. s50(1) clarifies the 50% charge on the first death of a person notionally entitled to only part of the income if there were any; without that the charge would be on 100%. On the second death it is on 100% unless on the first death the relevant part of the fund ceased to be settled or went into a RPT. This seems unlikely as the survivor would then have had to share the house. If on the first death the remainder was not accelerated as to any part of the property the survivor does not acquire anything new as a result of the prior termination charge on part: their interest in the underlying property is what it always was in reality and it is now also for s49 indubitably in the entirety.

I do not accept that in some mysterious way the survivor has acquired an interest from the deceased joint tenant. s50(1) applies to clarify the s52(1) charge at a time when there is more than one IIP owner. On the second death s50(1) is simply not engaged.“Where the person referred to in section 49(1) above is entitled to part only of the income (if any) of the property” is simply not a true statement at the time of the second death.

Jack Harper

| paul Paul Saunders
22 August |

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An underlying factor, as Jack has flagged is whether, on the death of the first beneficiary in 2020 the interest in remainder vested in possession.

Based on my reading of the original post, the right of occupancy would appear to be a joint life interest.

At the time of the testator’s death (1993), the children’s interests would have been qualifying interests in possession (QIIP), aggregating with their own estates on death.

However, by the time the first beneficiary died (2020), the IHT changes brought in by the Finance Act 2006 applied. Accordingly, the right of occupancy accruing to the surviving beneficiary could not be a QIIP, as the requirements for there to be a transitional serial interest are not met.

In consequence, with effect from the death of the first beneficiary, the surviving beneficiary only had a QIIP in a half share of the property (their original IIP), and a non-qualifying IIP in the other half of the property, which is relevant property subject to ss.58-85 IHTA 1984.

A proportionate periodic charge would have applied in respect of the non-qualifying IIP in2023, and on the death of the surviving beneficiary there is an exit charge.

Curiously, in this scenario, the effect of the 2006 IHT changes is usually to reduce the overall IHT liability than would have arisen if the whole of the property ha remained subject to a qualifying IIP!

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

5

Jack, if what you are saying is correct, then on the death of the first beneficiary there would have been no disposition/transfer of value for IHT purposes.

If you agree there would have been a chargeable event, then the IHT consequences must follow.

If you do not/cannot agree that an RPT arose, then i think we must agree to disagree.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support andadvicetofellowprofessionals

6

There is no disposition of anything in the real world on the the first death; death terminates a life interest by operation of law. S52(1) has to perpetuate the fiction: “as if at that time he had made a transfer of value…….

Jack Harper