Under Inheritance Tax (IHT) law, in order for a gift to be effective for IHT purposes, it is necessary that the person making the gift does not have an 'interest in possession' of the gifted asset after the gift is made. This basic rule means, for example, that a person who gifts a property to his or her children, but continues to live in it, will normally find that it is treated as being part of their estate for IHT purposes, despite no longer being legally theirs, because they retained an interest in the gifted property.
A recent case considered the position when a man died, leaving his house to a discretionary trust. The will put the decision as to who could occupy the property at the discretion of the trustees, but stipulated that the property could only be sold with the agreement of the man's widow. The trustees allowed her to live in the house.
When she died, HM Revenue and Customs decided that the widow had a taxable life interest in the property and the executors of her estate appealed to the Special Commissioners of Taxes. The Special Commissioners concluded that the fact that she had the right to prevent the sale of the property did not alter the fact that it was held by the discretionary trustees. Since she could not compel the trustees to allow her to live in the property, she did not have an interest in possession of it.
"Had the trust set up by her late husband's will contained a direction to the trustees to allow the widow to live in the property, the decision would almost certainly have gone the other way," says Tracy Creed. "However, following changes announced in the 2006 Budget, such arrangements will no longer be effective for IHT purposes."
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