The observation that the tax legislation is not always a model of clarity and precision is something of an understatement. The lack of a statutory definition of certain terms can be the cause of some uncertainty and dispute between taxpayers and HMRC. 

This article focuses on the meaning of interest in possession (IIP) for inheritance tax (IHT) purposes, generally outside the ambit of an express trust.

What does it mean?

Interest in possession is a concept of general law (NB, the law in Scotland differs and is not considered here). It was expressed to give “a present right of present enjoyment” as far back as 1820 (Preston’s Treatise on Estates).

However, the expression is not defined in IHT terms, which merely states: “A person beneficially entitled to an interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsists” (s49(1), Inheritance Tax Act 1984). 

In the absence of a formal written settlement, establishing a beneficial interest in property generally involves demonstrating the existence of a ‘resulting’ or ‘constructive’ trust (for example, see Jones v Kernott [2011] UKSC 53). Under Trusts of Land and Appointment of Trustees Act 1996 (TLTA 1996) (which does not apply in Scotland), an individual who is beneficially entitled to an IIP is entitled to occupy a property by reason of their interest if the trust’s purposes includes making the land available for a beneficiary’s occupation, or if the trustees hold the land for that purpose (s12, TLATA 1996). However, the trustees may exclude or restrict a beneficiary’s entitlement in certain circumstances (s13).

HMRC’s view

HMRC explained its view on IIPs in a press release of 12 February 1976, in the context of settled property. It confirms that an IIP in property exists where the person having the interest has an immediate entitlement to any income from the property as it arises. ‘Enjoyment’ can still arise irrespective of whether the property produces income (IHTM16062).

In Statement of Practice 10/79, HMRC explained its position where wills (and trusts) contain a power to allow a beneficiary to occupy a dwelling house. It states: “If the power is drawn in terms wide enough to cover the creation of an exclusive or joint residence, albeit revocable, for a definite or indefinite period, and is exercised with the intention of providing a particular beneficiary with a permanent home, HMRC will normally regard the exercise of the power as creating an interest in possession.” By contrast, non-exclusive occupation is not considered to create an IIP.

Case law findings

In the absence of an IHT definition of an IIP, case law (albeit pre-dating IHT) has offered some assistance. In Gartside v Inland Revenue Commissioners [1967] UKHL 6, the House of Lords (HL) held that the beneficiaries of a trust did not have IIPs for estate duty purposes. Lord Reid stated: “‘In possession’ must mean that your interest enables you to claim now whatever may be the subject of the interest. For instance, if it is the current income from a certain fund your claim may yield nothing if there is no income, but your claim is a valid claim, and if there is any income you are entitled to get it.” This was contrasted with a right requiring the trustees to consider making a payment (ie, an expectant interest), which required the trustees’ discretion.

Subsequently, in Pearson and Ors v IRC [1981] AC 753, the House of Lords (HL) had to decide whether three children of a trust settlor were entitled to an IIP in settled property from age 21 until capital was appointed to them, for capital transfer tax purposes; the Inland Revenue contended that they did not. The HL held (by 3:2 majority) agreeing with the Inland Revenue. Viscount Dilhorne stated: “In my opinion the words ‘interest in possession’ … should be given their ordinary and natural meaning, which I take to be a present right of present enjoyment…” (emphasis added). 

Make yourself at home

Someone with a right to reside in a property under the terms of an individual’s will could have an IIP for IHT purposes. HMRC considers that the leading IHT case on rights of residence is IRC v Lloyds Private Banking Ltd [1998] 2 FCR 41. In that case, a wife’s will left her tenant-in-common share in the matrimonial home upon the following terms: 

“While my husband remains alive and desires to reside in the property … my Trustee shall not make any objection to such residence and shall not disturb or restrict it in any way and shall not take any steps to enforce the trust for sale on which the property is held or to realise my share therein or to obtain any rent or profit from the property.”

The High Court considered that this clause in the wife’s will was a dispositive provision conferring on the husband an IIP in the half-share in the property, which accordingly formed part of his estate. This decision has been applied in subsequent cases concerning IIPs in residential property (Woodhall v IRC [2000] SpC 261, and Faulkner (Adams’ Trustee) v IRC [2001] SpC 278).

On the other hand…

By contrast, in Judge (PRs of Walden deceased) v RCC [2005] SpC 506, a married couple lived in a property owned by the husband. His will included the following provision about the matrimonial home:

“And I declare my Trustees during the lifetime of my Wife to permit her to have the use and enjoyment of the said property for such period or periods as they shall in their absolute discretion think fit pending postponement of sale…” (emphasis added).

The Special Commissioner held that the surviving spouse did not have an IIP of the house because the deceased spouse’s trustees had absolute discretion over whether to permit the surviving spouse to occupy the property for any period, notwithstanding that a sale of the property required her consent. 

Most recently, in Trustees of the Carolina Raboni Estate v HMRC [2023] UKFTT 32 (TC), the testator’s will provided that her house be retained as her male friend’s home during his lifetime. The testator died in October 2004. Her estate comprised little besides the house. An IHT liability arose on the testator’s estate. There was insufficient cash in the estate to satisfy the liability. The residuary beneficiaries decided not to sell the house and paid the IHT personally. The testator’s friend died in March 2017.

The First-tier Tribunal had to decide whether the testator’s friend had an IIP in the property. It was common ground that the testator’s will would have given her friend an IIP in the house had there been sufficient liquidity in the rest of the estate to pay the IHT liability. However, due to the presence of a creditor once the estate contained only the property, the testator’s friend could not enforce a right under the will to live there. Consequently, he did not have an IIP in the property.

Black, white, or grey

The drafting of wills requires clarity and precision, to prevent unexpected outcomes and possibly litigation. Determining whether an IIP exists is essential in terms of establishing the correct IHT liability on the testator’s death, the IHT treatment for the putative life tenant, and the incidence of IHT, as well as the submission of an accurate return to HMRC. The powers of personal representatives or trustees should be clearly distinguished between those of disposition and administration.

Mark McLaughlin, CTA (Fellow), ATT (Fellow), TEP is editor and a co-author of Ray & McLaughlin’s Practical IHT Planning (Bloomsbury Professional).