#5359 - Inheritance Tax - Tax Law

• Legal requirements

  • Non-consensual

  • No intention to confer value

• S1 It is a charge on chargeable transfers

• s2: chargeable transfer is transfer of value made by individual that is not exempt

• s3: transfer of value is disposition causing loss to the estate.

  • loss to estate is measure so catches deliberate sale at undervalue

    • note consequence of selling controlling share i.e. >50% shares.

• It is a chargeable transfer if it is a transfer of value

  • Calculated by the value of loss to the estate

  • Specific cases

    • Omissions not included in s.3(3)

    • Trransfers not intended to confer gratuitous benefit, not included, s.10

• PETs are prima facie chargeable transfers that are potentially exempt (so a subset)

RATES

• Life transfers

• Transfers on death

1. Fundamental principle

   • inheritance tax shall be charged on the value transferred by chargeable transfer, s.1

   • What is a chargeable transfer? S.2

     • A transfer of value s.3

       1. A disposition causing a loss to the value of D’s state, s.3(1) IHTA 1984

          1. Disposition

             1. Includes omissions, s.3(3) IHTA

                1. So for example if D makes a tax free transfer to his son by engaging him to work for a specified tim and then omits to sue

                2. Unless you can show that it was not deliberate, s.3(3) IHTA 1984

             2. DOES NOT include transfers not intended to confer gratuitous benefit, s.10 IHTA 1984

                1. A subjective non-donative intent Executors of Postlethwaite v HMRC (2006) payment made under binding legal obligation would not be intended to have a subjective non-donative intent

                2. And an objective fact

                   1. A transaction at arms length between two persons not connected to each other, s.10(1)a IHTA 1984

                   2. Such that it might be expected to be made so, s.10(1)b IHTA 1984 IRC v Spencer-Nairn (1991) there was subjective non-donative intent but the property was sold for 94000 below market price because he mistakenly thought he was liable for repairs. It was a connected person. Held that the discrepancy was only one factor which had to be taken into account – arms length vendor shold have actual vendor’s reasonable belief

             3. Associated operations rule, s.268, IHTA 1984

                1. Affect the same property

                2. One is effected with reference to another and both must be relevant to the scheme MacPherson v IRC (1988)

                3. The charge is deemed to take place at the time of the last of them

          2. Loss to value

             1. The value of his estate after the disposition is less that it would be but for the disposition, and the amount by which it is less is the value trasnferre

          3. D’s estate

             1. All property to which a person is beneficially entitled

                1. Includes rights and interests of any description, s.272 IHTA 1984

                   1. Melville v IRC (2001) had settled property on discretionary trusts but included a provision where he had the right to require the trustees to transfer the whole of the trust fund back to him after 90 days. This was a right

                2. A person with an interest in possession is treated as beneficially entitled to the underlying trust property, s.49 IHTA 1984

     • Made by an individual

     • That is not an exempt transfer

2. What happens to chargeable transfers?

   • They enter the cumulative total of transfers at once, and if they exceed the nil rate band, give rise to a charge straight away.

   • PETs do not enter the total unless and until D dies within 7 years

     • Then they are chargeable as lifetime transfers

WHAT HAPPENS IN LIFE

1. General

   • Rates are 0 on first 325,000 and 20% on everything else

   • Only those which are not PETs are immediately liable to charge (immediately chargeable transfer/ICT)

     • They will be charged based on the cumulative total of such transfers within the previous 7 years

     • These must be grossed up, per s.5(4)

       1. Rationale

          1. If D pays the inheritance tax the tax is itself taxable because his estate is diminished by what he transfers to the transferee but also by what he has to pay to the revenue

          2. So NO GROSSING UP if A makes a transfer to B stipulating that B must pay the IHT on it

       2. Example

          1. If S gives 200, this is treated as the sum which is left after paying IHT, so the 80%

          2. So after grossing up the gift is 250,000

2. The rules for PETs

   • Effect of being a PET

     • No immediate charge

       1. So no grossing up

     • If the transferor lives more than 7 years – no charge

     • If the transferor dies within 7 years

       1. PET becomes chargeable at the death rate (subject to some relief if he has survived at least 3 years)

       2. It becomes retrospectively a chargeable transfer, and thus will have to be taken into account in working out the trasnfer’s cumulative total for subsequent transfers

3. What is a PET? S.3A IHTA 1984

   • One made by an individual

   • That would otherwise be a chargeable transfer

   • Which is made to another individual

     • S.3A(2)a if the value transferred becomes in the estate of that individual

     • S.3A(2)b if does not become comprised in the estate of the other, their estate must be increased

       1. E.g. paying of a debt

     • If it does not fall under these two it is an immediately chargeable transfer

   • The anti-avoidance rule to prevent abuse of PETS – Gifts with reservation, s.102 FA 1986

     • Requirements

       1. Possession and enjoyment is not bona fide assumed by the done at the beginning of the relevant period

          1. Violated if D enjoys significant control over the trust Lyons Personal Representatives v HMRC (2007)

       2. OR At any time in the relevant period the property is not enjoyed to the entire exclusion of the donor and of any benefit to him by contract or otherwise

          1. AG v Seccombe (1991) the last limb catches collateral benefits

          2. Oakes v Commissioner of Stamp Duties (1956) S settled property and he had no interest in it, but was caught when he was appointed as a trustee with a right to remuneration

       3. Within 7 years prior to the death of the holder

       4. Benefits are defined in Schedule 20, FA 1986

          1. Excludes

             1. Actual occupation of the land by the donor in return for full consideration, s.6(1)a FA 1986, Sch 20

             2. Where the donor comes back into actual occupation of the land owing to his incapacity or change of circumstances and the done is related, s.6(1)a FA 1986, Sch 20

     • A fine distinction to be made

       1. Between a benefit reserved out of the property, which is caught by s.102

       2. And a benefit retained because it was never given away

          1. This is not caught, and is therefore still a PET

          2. Vertical division by time – what is not given away cannot be interfered with

          3. Special rules for land, s.102A, FA 1986

             1. After the success of the lease carve out scheme in Ingram v IRC (1999)

             2. It is a gift with reservation if

                1. D or spouse has a significant right or interest in the land

                2. D or spouse is party to a significant arrangement over the land

     • Effect

       1. If there is still a reservation at the time of death

          1. The property is deemed to be part of the donor’s estate at death and charged as if he had never given it away

          2. Sillars v IRC (2004) Added daughters names to account, but D was still entitled to a share of the account at death, so deceased is taken to have never given it away.

       2. If there ceases to be a reservation within 7 years before D’s death

          1. The donor is treated as if he had made a PET at that date

          2. And then the property is retrospectively charged under the PET rules

       3. If the gift ceases to be a reservation earlier than 7 years before death

          1. No charge

     • Additional muscle – income tax charge

       1. FA 2004, Sch 15 charge on annual value of property to the extent not paid for by a person

WHAT HAPPENS ON DEATH

1. General

   • D is treated to have made a transfer of all his property immediately before death, s.4

   • This must then be added to the cumulative total of his chargeable lifetime trasnfers made in the last 7 years

     • Whether originally chargeable

     • Or having become chargeable by the loss of their PET status

   • Rates

     • 0 on first 325,000

     • 40% after

EXEMPT TRANSFERS

Exempt transfers in life and death

2. Spouses and civil partners, s.18

   • Requirements

     • The value transferred is attributable to property which becomes comprised in the estate of W

     • OR to the extent that W’s value is increased

       1. E.g by H forgiving W’s debt

   • Limits, s.18(3) IHTA 1984

     • If it takes place after the termination of TOV of any interet or period

       1. So gift to X and then to W, Cannot

     • If the disposition depends on a condition which is not satisfied within 12 months

       1. Exception for survival periods - So H to W if she survives him by 18 months

   • Now you can transfer the nil rate band from one spouse to another, s.8A IHTA 1984

     • This is technically the percentage, so you can take advantage of increases

Exempt transfers in life

3. Family maintenance, s.11

   • Spouses to each other or parent to child

     • So no IHT where parent pays school/university fees, but will be if grandparent does, this does not come under s.11

   • The Revenue view is that a transfer on death cannot be a disposition for the maintenance of family

4. Transfers not exceeding 3,000, s.19

   • These are values without grossing up and are an annual exemption

   • It can be carried forward into the next year to be used AFTER the amount for that year, and no further

   • Relationship with PETS

     • Relied is...