Inheritance Tax Notes

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...

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