#2412 - Inheritance Tax - Tax Law

Inheritance Tax

Chargeable transfer

• S1 charges IHT on the “value transferred by a chargeable transfer” which is “a transfer of value… made by an individual”- s2(1). “individual” does not inc trustees, but there are deemed transfers of value in the case of trusts.

3: Transfers of value.

• A ToV is a disposition made by a person as a result of which the value of his estate after the disposition is less than it would be but for the disposition; and the amount by which it is less is the value transferred by the transfer.

• No account shall be taken of the value of excluded property.

• Where the value of a person's estate is diminished, and the value–

  • of another person's estate, or

  • of any settled property,

• Is increased by the first person's omission to exercise a right, he shall be treated as having made a disposition at the time (or latest time) when he could have exercised the right, unless the omission was not deliberate.

• Section 272: the word “disposition” is defined as including a “disposition” effected by associated operations”.

Actual transfers of value

• IHT is charged on the value transferred by a chargeable transfer. A transfer of value is any disposition made by a person as a result of which the value of A’s estate is less than it would be but for the disposition. What is charged is not increase in the disponee’s assets, but the amount by which the value of the disponor’s estate is less

• However, if it is shown that the transfer was not intended to confer any gratuitous benefit on any person and either it was made in a transaction at arm’s length between persons not connected with each other or was such as might be expected to be made in such a transaction, there is no transfer of value.

• Property is widely defined in s272 as ‘including… rights and interests of any description’. It will therefore cover equitable rights, debts and other choses in action, and any rights capable of being reduced to a money value.

• A person beneficially entitled to an interest in possession in settled property is treated as beneficially entitled to the property in which the interest subsists and not to the interest itself. Thus the tenant for life of a fund worth 100,000 whose free estate is worth 50,000 will on death make a chargeable transfer of 150,000.

• All dispositions which diminish the value of the disponor’s estate are transfers of value unless s10 applies.

10 Dispositions not intended to confer gratuitous benefit.

• A disposition is not a transfer of value if it is shown that it was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person and either:

  • that it was made in a transaction at arm's length between persons not connected with each other, or

  • was such as might be expected to be made in a transaction at arm's length between persons not connected.

• “disposition” includes anything treated as a disposition by virtue of section 3(3) above;

• “transaction” includes a series of transactions and any associated operations.

• Example 2) A gives his house worth 300,000 to B. obviously chargeable- totally gratuitous.

• Example 3) A sells his house to B for 300,000. Disposition- yes. But value of your estate has to be reduced- no. don’t need s10 at all because no diminution in value of estate.

• Example 4) A sells his house to B for 250,000 thinking that is its market value, when in fact it is worth 300,000. Diminution in estate but no intention to confer gratuitous benefit in part. It is a transaction at arm’s length to parties not connected to one another.

• Example 5) The same facts as Example 4) except that A knows that 250,000 is not the full price, but he has to accept B’s offer because he is desperate to obtain money very quickly to stave off bankruptcy. Assuming this is best interesets then at arm’s length. Not intention to confer gratuitous benefit.

• Example 6) What diff would it make in (4) if A and B were brothers? What would someone bargaining at arm’s length do? Do unconnected persons usually sell at undervalue? No.

• Example 7) A buys a cruise ticket for 8k to have a cruise on his retirement. Potentially need protection of s10 because not nec no diminution in value. s10- not intended to confer gratuitous benefit on anyone.

• Example 8) G pays 70,000 to the Market Snodsbury School as a composition fee to cover his grandson’s schooling from the ages of 13 to 18. No gift to school but gift to son.

• Example 9) A enters into the following transaction with N, her nephew, to help him secure finance for his ailing business. She purchases his house for 300,000 (which is its market price) and she then lets it back to N on a tenancy which gives him statutory security of tenure at a “fair rent” fixed by the rent officer. As a result the value of her freehold reversion is 100,000. At first stage same as example 3. Lease back had diminished aunt’s estate by 200k. they are connected but what would people who are not connected do? Not this.

S268 Associated operations.

• In this Act “associated operations” means any two or more operations of any kind, being:

  • operations which affect the same property, or one of which affects some property and the other or others of which affect property which represents that property, or

  • any two operations of which one is effected with reference to the other.

• whether those operations are effected by the same person or not, and whether or not they are simultaneous

• “operation” includes an omission.

• Where a ToV is made by AOs carried out at diff times it shall be treated as made at the time of the last of them.

• Operations can be associated although there is no avoidance scheme and they take place many years apart:

  • s 268 should apply only where there is an overall scheme or plan; but cf. section 268(1)(a).

  • only cases where the individual operations are not transfers of value taken by themselves, but are a transfer of value if looked at together; but cf. section 268(3).

• “disposition” includes a disposition effected by associated operations. So composite disposition and then treat as a ToV the amount by which the transferor’s estate was diminished by those operations taken as a whole.

• s 10 criteria also have to be applied to any “associated operations and any “series of transactions” – see s 10(3).

• Thus, if any associated operation involves gratuitous benefit or is not arm’s length, or any part of any series of transactions involves gratuitous benefit or is not arm’s length, the protection of section 10 is lost.

• Example 11) H has used up his annual exemption of 3,000, but W has not. W has no significant property of her own. H gives W 3,000 on condition that she gives it to their son. Composite disposition doesn’t get exemption.

• Example 12) H has already made transfers of value of 300,000. He gives 100,000 to his wife, W, for her own use and benefit absolutely. In future years she uses it to make gifts to S. Same.

• Example 13) A owns factory premises which he does not wish to occupy or use himself. He has let them at a full rent on arm’s length terms to B in circumstances which give B security of tenure. As a result the value of the freehold has been diminished. Let off by section 10. Dominution in value of estate but let off by s10(1)(a)- arms’ length transaction between persons not connected with one another.

• Example 14) what if B were A’s son? Even if were connected kind of thing done by persons not connected.

• Example 15) Same, except that A gives the freehold reversion to his son, B, 2 yrs after grant of the lease.

  • Now into possible associated operations argument. Argument for taxpayer is that first is let off by s10. Ok second bit was charged but at lower value- giving away only freehold version. This is going to fail.

    • S272: says that ‘disposition’ includes a disposition effected by associated operations.

    • S10: can’t let you off because there was an element of gift in at least one stage of the transaction so fail opening words of section.

  • Directly applying s 10 catches it anyway because s10(3) says ‘a transaction includes a series of transactions and any AOs. If you confer a gratuitous benefit at any stage of the AOs affects whole. So granting a lease to reduce the value of the reversion and then giving away the reversion doesn’t work.

• Example 16) A owns 200 acres of farmland worth 800,000. He grants a tenancy of the land at full rent on arms’ length terms to a partnership consisting of his son and his daughter-in-law. By reason of security of tenure under the Agricultural Holdings Act the value of the freehold reversion is reduced to 400,000. A year later A gives the freehold reversion (subject to the tenancy) to his son.

  • The grant of a tenancy of agricultural property is not a transfer of value if made for full consideration. S16. Odd because s10 would have let off anyway.

  • S16 prevents the revenue using s10- depends on treating the grant of the lease as a transfer of value and s16 says it isn’t a transfer of value.

  • Can still use s272 to argue that the whole thing is associated.

• Example 18) How, if at all would the answer to Example16) differ if the gift of the freehold reversion to A’s son took place 4 years after the grant of the lease? S268(2)- not associated if more than 3 years.

• Example 19) A pays for two cruise tickets costing 10,000 each, one for himself and the other for his partner. Consider the following alternatives:

  • A makes the contract with the Cruise Company in respect of his ticket and his partner makes the contract in respect of her ticket, but A pays for both. Let off by s10. Commercial transaction not intended to confer...