Exemptions Notes

EXEMPTIONS ! These take effect either by confirming that a transaction is not a transfer of value or by confirming that a transaction which is a transfer of value is nevertheless exempt from charge. To the extent that there is a substantive difference between these two mechanisms, it is too subtle for the present course. ! Also note that the spouse exemption, charity exemption and BPR also apply on death transfers. ! Others ! Bad Bargains (1) ! Family Maintenance (2) ! Disclaimers of legacies and deeds of variation (3) ! Annual Exemption (4) ! Small Gifts (5) ! Normal Expenditure Out of Income (6) ! Marriage (7) (1) Bad Bargains Non-commercial transfers ! It has been said that IHT is a tax on non-commercial transfers - i.e. "gifts tax". It is not used in the legislation but the use of the words "gratuitous benefit" in s.10(1) make it clear that the tax only bites on transfers which contain an element of gift. Sales at market value are not taxable because they do not involve any diminution of the value of the seller's estate. ! As a general rule a sale or purchase at market value does not result in a diminution of the estate. ! However, a bad bargain or the purchase of an immediately depreciating asset, such as a new car, can cause a reduction in the value of the estate and would prima facie be chargeable to IHT. ! A sells a car worth £800 for £500 - this can occur because he wished to confer a benefit to the buyer, or because he made a bad bargain - the former is taxable, the latter is not. ! IHTA 1984, s.10 remedies this by ensuring that a disposition is not a transfer of value if it was not intended to confer any gratuitous benefits and (a) it was made at arm's length between unconnected persons or (b) it was on arm's length terms. ! Requires 2 conditions be met: ! A subjective non-donative intent ! The objective fact stated in (a) or the apparently objected fact stated in (b) ! 'Connected persons' is defined in s.270 by reference to TCGA 1992, s.286. ! Where the parties are connected (relatives, linked in a trust, partners involved with a close company) the criterion imposed by (b) of what would be expected to amount to an arms-length transaction was discussed in Spencer-Nairn ! Note that (a) is important, because it means that payment for services is not a transfer of value, e.g. professional fees, health therapist. … IRC v Spencer-Nairn [1991] (Court of Session) ! Vendor was unaware he was selling to a connected person (a company). He sold for £94K below market value because he mistakenly thought that he was liable for repairs to the property. Revenue agreed there was no gratuitous intention but argued that the discrepancy between the market value and the actual value in the land meant that it was not one which could have been expected on an arm's length deal. ! Held a hypothetical arm's length vendor should be taken to have the actual vendor's (reasonable) belief that he was liable for repairs and so, since the price was not unreasonable given that belief, they found for the tax payer. So fell within s. 10(1)(b). ! Consequences: in assessing what can be expected on an arms-length sale certain subjective factors, such as reasonable belief in this case, are to be taken into account ! INTENT TO CONFER A GRATUITOUS BENEFIT ! Where the parties are not connected, the central issue is whether the transferor can show the negative intent of not conferring any gratuituous benefit on the transferee. ! In Re Postlethwaite [2007] - Dr P had set up a company, P Co, of which he was the sole employee and sole shareholder. Dr P was a brilliant car designer and engineer, and was one of the best of his era in Formula One motor racing. P Co received fees from the Ferrari motor company and transferred them to a pension fund for Dr P. The money was transferred to trustees on 31 August and Dr P was admitted on 1 September. This one-day gap caused a resulting trust, and so the payment did not come within section 13 ['Dispositions by close companies for the benefit of employees']. The Special Commissioners held that the payment came within section 10 and that the person who was the transferor was P Co. P Co did not intend to confer any gratuitous benefit on Dr P. The employment contract had provided for setting up a pension fund. Moreover—and this was crucial—the payment was not excessive when compared with what Dr P had earned for P Co from Ferrari. The person he intended to benefit was himself, and that was not gratuitous. (T&L p.759) ! The fact that there was a gratuitous benefit actually conferred was not determinative but simply a factor as to intent, which was the key issue. They considered that a payment made under a binding legal obligation would not be se intended. They also thought that past consideration might well negative the intention. On the facts they founf no such intention since the money paid was a sum to which the recipient already had an economic entitlement. (2) Family Maintenance ! Under s.11(1) there is no transfer of value if made by a party to a marriage in favour of the other spouse or a child of either spouse and it is for (a) maintenance of the other spouse or (b) maintenance, education or training of a child under 18 or in fulltime education or training. (grandkid's school fees - not your kids - but you can pay your own kids) ! The spouses don't have to be living together and in fact some payments of maintenance on divorce are exempt (see s.11(6)). ! Section 11(3) gives similar treatment for reasonable care and maintenance of dependent relatives. ! Official Revenue view is that the s.11 only applies to lifetime transfers, and not to transfers on death. The point has never been tested in the courts, but the Revenue view is probably correct, for one or other (or both) of two reasons: (1) the section uses the word 'disposition'. It is noticeable that the section relating to death (s.4) nowhere uses the word 'disposition'. It would seem to be a fair inference that wherever in the inheritance tax legislation the word 'disposition' occurs the enactment is referring only to lifetime transfers; (2) the section uses the phrase 'not a transfer of value', and it may well be (as some commentators assume) that wherever the legislation gives an exemption by saying that such-and-such shall 'not be a transfer of value' that exemption is confined to lifetime transfers and does not cover transfers on death. ! Child includes step-child and adopted child - in the section. Dependent relatives - explicit reference to reasonableness (of amount), whereas in the explicit mention of reasonableness. ! Has very little effect whilst a marriage or a CP is on-going. But it is a very useful provision so far as a child is concerned, as payment made by a parent to assist, e.g., a child who is a student if the payment is outside the 'normal expenditure out of income' exemption. ! Also applies to a disposition on the occasion of the dissolution or annulment of a marriage or a CP.

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