The reverter to settlor exemption

The general rule for IHT is that the life tenant of a settlement is deemed to be the owner of the underlying trust assets with the result that, on his or her death, they will be fully chargeable to IHT they, or a life interest in them, pass to the life tenant’s spouse. There is, however, a rather odd exception to this rule, under Section 54 of the IHT Act 1984. This provides that where, on the death of the life tenant but during the settlor’s lifetime, the property reverts to the settlor, the value of that settled property shall be left out of account in determining the size of the life tenant’s estate. Section 54(2) of the IHT Act 1984 goes on to provide that the effective IHT exemption will also apply on the death of the life tenant if the settled property reverts instead to the (UK domiciled) spouse of the settlor, or the widow or widower if the settlor, has died within the previous two years. This feature of the IHT legislation is something of a hangover from the days of Capital Transfer Tax when all lifetime transfers wee taxable, even if made more than seven years before the death. Section 54 will only apply on the death of the life tenant. If the life tenant releases his or her life interest so that the settlor (or the settlor’s spouse or the settlor’s widow or widower within two years of the settlor’s death) then a similar exemption is given by Section 53(3) and 53(4) of the IHT Act 1984.