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Example 1—purchase by life tenant of absolute reversionary interest

Property worth £300,000 is settled under the Will of Z on immediate interest in possession trusts for A for life, with remainder to B, and A has free estate worth £150,000. There will on A's death be an IHT charge on £450,000.

If A buys B's remainder for £120,000 the property will cease to be settled but there will be no possibility of an IHT charge on the settled property on that event because although A's life interest in the property terminates he becomes on the same occasion absolutely entitled to it¹ (see I5.251).

When A dies the formerly settled property will pass as his free estate. If it were not for IHTA 1984, s 55, there would be avoidance of IHT in the fact that A purchases B's remainder for full consideration of £120,000. This has the effect of reducing the value of A's free estate by £120,000 so that on A's death the total value of the property transferred