Reversionary Interests and IHT: Excluded Property Under s48 IHTA 1984
A remainder interest in a family life interest trust is generally excluded property for IHT — no IHT is charged on its value. The exceptions are purchased reversions and settlor-retained reversions.
IHT Treatment by Scenario
Child holds remainder interest in parent's life interest trust
Excluded property — no IHT on child's reversionary interest
s48(1) IHTA 1984: the reversionary interest is excluded property. The value of the remainder is not part of the child's taxable estate while the life interest subsists.
Charging event: IHT may arise when the life interest ends and the child becomes absolutely entitled: the trustees' appointment of trust assets to the child is a chargeable occasion or potentially exempt transfer depending on trust type.
Beneficiary purchases a reversionary interest from another beneficiary
NOT excluded property — full IHT value
s48(1)(a) IHTA 1984: a reversionary interest that was acquired for money or money's worth (i.e. purchased) is not excluded property. The purchaser includes it in their taxable estate at full value.
Charging event: On the purchaser's death, the reversionary interest (now vested or about to vest) is included in their estate at its then-value.
Settlor retains a reversionary interest in their own trust
NOT excluded property — included in settlor's estate
s48(1)(b) IHTA 1984: a reversionary interest is not excluded property where it is one to which the settlor, or the settlor's spouse/civil partner, is or has been beneficially entitled. This prevents settlors from avoiding IHT by giving away a life interest while retaining the reversion.
Charging event: The settlor's reversionary interest is valued as part of their estate. Gift with reservation rules (FA 1986 s102) may also apply if the settlor retains benefit.
Termination of an IPDI (immediate post-death interest) — life tenant dies
Life tenant's estate includes the trust fund at death
Where a life tenant holds an 'immediate post-death interest' (IPDI under s49A IHTA 1984), the trust fund is treated as part of their estate for IHT. On the life tenant's death, the trust fund is included in the IHT calculation. The remainder beneficiary does not pay IHT again on the same assets.
Charging event: IHT on the trust fund is paid from the trust assets or the life tenant's estate at the point the life interest terminates on death.
Frequently Asked Questions
What is a reversionary interest in trust law and how does it arise?
A reversionary interest — also called a remainder interest — is a future interest in trust property that arises when a prior interest ends. The most common example in wills and estate planning is a life interest trust: the will gives a life interest to, say, the testator's surviving spouse (the life tenant) and provides that on the spouse's death the trust fund passes to the children absolutely. The children's right to receive the trust fund in the future is their reversionary or remainder interest. The children have a proprietary right to the trust assets, but they cannot demand them now — they must wait until the prior life interest ends. Other forms of reversionary interest arise where a trust fund reverts to the settlor (resulting trust) or to a third party named in the trust deed on the occurrence of a specified event.
Why are reversionary interests treated as excluded property for IHT?
Under s48(1) IHTA 1984, a reversionary interest is excluded property — it is left out of a person's estate for IHT purposes. The policy rationale is to avoid double-counting: if IHT is charged on the full trust fund when the life interest ends (at the life tenant's death), charging IHT again on the remainder beneficiary's interest while the life tenant is still alive would be taxing the same assets twice. By treating the remainder as excluded property, Parliament ensures IHT is charged only once — at the point when the trust fund vests in the remainder beneficiaries. The excluded property status means a person who holds a remainder interest in a family trust does not need to include the value of that interest in their own IHT estate while the prior interest subsists.
When does a reversionary interest lose its excluded property status?
Section 48(1) IHTA 1984 contains two important exceptions that strip a reversionary interest of its excluded property status: (1) purchased reversion (s48(1)(a)): if the reversionary interest was acquired for a consideration in money or money's worth — i.e. the holder bought it from another beneficiary — it is not excluded property. The purchaser holds the interest as part of their taxable estate. This prevents a scheme where a remainderman buys a remainder cheaply and then argues it is IHT-exempt. (2) Settlor's reversion (s48(1)(b)): if the person holding the reversionary interest is, or has been, the settlor of the trust, or the settlor's spouse or civil partner, the reversion is not excluded property. This blocks the technique of a person creating a trust, giving away the life interest, and retaining the remainder — which would otherwise defer IHT indefinitely.
What IHT event occurs when a life interest terminates and the reversionary interest falls into possession?
When the life interest ends — typically on the life tenant's death — the reversionary interest 'falls into possession': the remaindermen become absolutely entitled to the trust fund. For IPDI (immediate post-death interest) trusts and transitional serial interest trusts under IHTA 1984 s49A–s49E, the trust fund is treated as part of the life tenant's estate at the date of death and IHT is charged accordingly. The trust fund is aggregated with the life tenant's own estate for rate purposes. The remaindermen receive the fund (net of IHT) without further IHT charge on their receipt. For discretionary trusts, different charging rules apply (ten-year charge under s64 and exit charges under s65 IHTA 1984). The transition in 2006 (Finance Act 2006) means post-2006 life interests created during lifetime are generally treated as relevant property trusts, not qualifying interest in possession trusts.
Can a reversionary interest be included in a deed of variation or a lifetime gift?
Yes — a reversionary interest can be given away or redirected in a deed of variation. If a beneficiary's reversionary interest is varied within two years of the relevant death under the deed of variation rules (s142 IHTA 1984), the IHT and CGT relation-back elections can apply. The reversionary interest itself is excluded property and has no IHT value, so a lifetime gift of it has no IHT consequences (it is not a transfer of value). However, if the remainderman's interest later falls into possession and the trust fund then becomes their estate, any CGT or IHT implications flow from the nature of the trust and the life tenant's death, not from the original gift of the remainder. Where a reversionary interest is sold for consideration (rather than given away), the exception in s48(1)(a) means the buyer holds it as taxable property — so purchased reversions should be approached with care.
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