How is a right of occupation in a property granted by a will treated for inheritance tax purposes?

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If you give a right to occupy a property for life under a will, this will create a life interest the value of which will form part of the occupant’s estate for IHT purposes.  This is known as an Immediate Post Death Interest, or IPDI.

If the will only grants a limited right of occupation (until marriage or co-habitation for example) the position is slightly different.

Where a beneficiary of a trust has an immediate right to receive the income arising from the trust property, or have the use and enjoyment of it then they will have an interest in possession (IIP) in the trust.

Qualifying interest in possession trusts (most typically IPDI interests or older IIP interests pre-dating 2006) are treated, for inheritance tax  (IHT) purposes, as though the assets belonged to the life tenant.   A life interest that may be terminated by an event, for example the marriage of the life tenant or by the trustees exercising an overriding power of appointment may still be an IIP trust for IHT purposes until such time as that event happens.

Where an immediate post-death interest (IPDI) ends during the life tenant’s lifetime and the trust assets pass to another individual absoltely, the life tenant is treated as making a potentially exempt transfer (PET) for inheritance tax (IHT) purposes (sections 3A, 49(1) and 52(1),  Inheritance Tax Act 1984 (IHTA 1984).

Care must be taken to ensure that this is a Qualifying interest in possession trust, as the tax regime is entirely different for any other type of Trust and can give rise to an immediate tax charge on ending the interest early.

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