No interest in possession for IHT

In Nicholas John Hall and Christopher Valentine Lopez as Trustees of the Carolina Raboni Estate v HMRC [2022] TC08691, the First Tier Tribunal (FTT) agreed that there was no Interest In Possession (IIP) in a house where the estate assets, apart from the house, were insufficient to pay the Inheritance Tax (IHT).

Under her will Mrs Raboni left her house to her five nieces and nephews (the residuary beneficiaries):

• Her friend and neighbour, Mr Boggia, were granted a right to live in the property for life free of charge other than insurance and maintenance costs. The property was not to be sold without Mr Boggia’s written consent. He moved into the house after Mrs Raboni’s death.
• As Mrs Raboni’s estate contained little beyond the house there was not enough cash to pay the Inheritance Tax (IHT) liability of £15,600.
• The residuary beneficiaries paid the IHT personally instead of selling the house, having been advised by their lawyers that any sale would have to be subject to Mr Boggia’s right to occupy.
• Mr Boggia died whilst resident in the house which was then sold. The trustees paid IHT of £190,000 on the basis that Mr Boggia held an Interest In Possession (IIP) in the house when he died. They later made a repayment claim on the grounds that there was no such IIP.
• HMRC issued a determination on the basis that there was an IIP. The trustees Appealed stating that there was no IIP and Mr Boggia was only permitted to remain at the property under a gratuitous licence from the residual beneficiaries.

The FTT allowed the appeal. The lack of liquidity in the estate was crucial to the decision:

• An IIP is defined as ‘a present right to present enjoyment.’
• Had there been sufficient cash in the estate to pay the IHT Mr Boggia would have had an IIP.
• Had the property been sold to fund the IHT no IIP would have existed. Mr Boggia had a right to reside at the property and not to have alternative accommodation provided. The judge queried whether any sale would actually have been subject to Mr Boggia’s right to occupy.
• Whilst the trustees may not have been under a duty to sell the property it was important to consider what was within their power and what could be compelled:
  • HMRC could compel them to pay the IHT, including forcing a sale.
  • The beneficiaries could compel them to administer the estate.
• It, therefore, followed that Mr Boggia could not enforce a right under the will to live in the Property and so did not have an IIP in the property when he died.

Useful guides on this topic

UK Trusts
What is a trust? What types of trust are there? How are UK trusts taxed?

Acting for a trust? Start here…
This is an essential guide for advisers and trustees on how to manage the tax affairs of a UK trust and how to avoid common pitfalls.

Trusts & Tax planning
What is a trust? How can trusts be used in tax planning? What are the advantages and what are the pitfalls?

IHT: Estate planning checklist
This checklist covers some of the essential planning points that taxpayers should know when planning for their estate and Inheritance Tax (IHT).

External link

Nicholas John Hall and Christopher Valentine Lopez as Trustees of the Carolina Raboni Estate v HMRC [2022] TC08691