Readers’ forum: A question of time
Writing for Taxation magazine’s readers’ forum, BKL tax adviser Terry Jordan responds to a reader’s query on optimising the current inheritance tax reliefs.
‘I understand there is concern that future governments could reduce the availability or the current rates of agricultural property relief (APR) and business property relief (BPR). I am therefore looking at options to ‘bank’ the present attractive rates of relief. While taking into account the capital gains tax and other practical considerations, my thoughts are to look at transferring relevant property now to secure these inheritance tax reliefs. It seems that APR and BPR would become relevant only in the event of the transferor dying within seven years from the date of the transfer because after that time the property will fall out of the transferor’s estate and no further inheritance tax reliefs are needed. On APR, HMRC’s Inheritance Tax Manual at IHTM24140 states that, for a potentially exempt transfer that becomes chargeable as a result of the donor’s death, the rates at the date of death apply.
This suggests that if a transfer is made now, but the rates of APR are reduced before the death of the transferor, and the death occurs within seven years, then the reduced rates of APR at the date of death would apply to the transfer, not the rates in place at the date of the transfer.
Please could readers let me know whether my understanding is correct and, if so, are there any other strategies for securing the current rates of relief.’ Query 19,331– Sonata.
Reply by Terry: the Office of Tax Simplification report may herald changes to reliefs
‘As Sonata says, if a potentially exempt transfer becomes chargeable on death within seven years relief is afforded at the rate applicable at the date of death. It is also necessary to consider the ‘retention’ rules. The donee needs to keep the property for seven years or until the earlier death of the donor and, except in the case of shares or securities, the conditions for relief (apart from the minimum period of ownership) need to be satisfied on a notional transfer made by the donee on the death of the donor.
As long as relief would be available at 100%, transfers to trust that are immediately chargeable are preferable to potentially exempt transfers. As set out in the Inheritance Tax Manual at IHTM24140, relief is afforded at the rate applicable on the date of transfer and the rates as at the date of death apply when calculating any additional tax. Importantly, the chargeable lifetime transfer is not cumulated with the estate on death when calculating the tax on the latter (IHTA 1984, s 113A and s 124A).
Following the Nelson Dance case ( EWHC 71 (Ch)) relief may apply to the transfer of a business asset as long as its value is attributable to relevant business property.
On a transfer to trust, capital gains tax holdover relief under TCGA 1992, s 260 takes precedence over s 165. However, for the relief to be available, the settlor and their spouse or civil partner and minor unmarried children must be excluded from present or future benefit. Even if holdover relief is available, the gain is not extinguished as it would be on the death of the owner.
Also, consider reservation of benefit under FA 1986, Sch 20 para 8. In most cases of genuine businesses and working farms, the owner or farmer will not wish to be permanently excluded from benefit even if they fear a change in the legislation.’
The article is also available on the Taxation website.
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