If a testator freeholder creates a tenancy for life in her will. Should the property be valued immediately before her death (i.e. with vacant possession) or should the reduction in value resulting from the creation of the tenancy for life be taken into account under s.171 IHTA 1974?
A life interest in a property in a Will does not have any affect on the value of the property at the date of death, and an open market value on a vacant possession basis should be used.
Patrick Moroney
I am somewhat confused here. A property subject to a life interest is surely worth less than a property without one. Therefore, when the testator died, the value of their estate has changed by reason of their death. Their death has led to the will coming into effect, and, therefore, the life interest on the property coming into effect. As the change in the property value was caused by reason of the death, should it not be taken into account under s.171 IHTA 1984? I note that s.171 does not apply to the termination of any interest. However, I do not see how the creation of a life interest terminates any interest.
You need to look at s4(1) IHTA 1984: “On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death.” At the point immediately prior to death the Will cannot have taken effect to create the IIP.
I agree that s.4(1) IHTA 1984 states that the transfer of value to be taxed is the transfer of the estate immediately before death, but s.171(1) states that changes in the value of the estate “by reason of the death” are taken into account as if they occurred before death. My point is that “by reason of the death” a life interest came into existence, which changed the value of the estate, and, therefore, that change in the estate value should be taken into account as it is treated as if it occurred immediately before death.
See s43(3). The will would seem to create a settlement.
The change in the value of the estate has not “occurred by reason of the death” but by virtue of the provision of the will granting the tenancy at will. I agree with the analysis in IHTM04046, which gives helpful examples e.g.
"A life assurance policy maturing on the death is valued as a sum immediately payable;
Property that becomes vacant on the death is valued with vacant possession;
Damages payable to the personal representatives under the Law Reform (Miscellaneous Provisions) Act 1934 are included in the death estate;
If the deceased’s death causes a fall in the value of shares, this is taken into account"
The reduction from VP to tenanted value is not caused BY the death itself but by the Will.
Jack Harper