Inheritance Tax Reservation of Benefit Issues

Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of 'Monthly Tax Review', reports on a recent talk by Gill Steel 'IHT & CGT - Some Particular Problems', concentrating on 'Reservation of Benefit'.

1. Reservation of Benefit Avoidance: Pre-Owned Assets Valuations in a Falling Market

To apply the Pre-Owned Assets Tax (POAT) charge the asset has to be valued. The SI 2005/724 Regulations were issued on 18 March 2005 (as envisaged by para 4(5) of the Schedule) to confirm the basis of valuation as 6 April (or later in the year if the rules apply to an asset from the later time). The valuation will last until the 5th anniversary when it will need to be reviewed. Regulation 4 does not deal with intangibles, only rental values for land and chattels.

Intangibles will need to be revalued each year.

For many taxpayers caught by the POAT regime from the beginning, a fresh valuation will be required at 6 April 2010. The five year principle is obviously good news in a rising market, though less so in a falling market.  However, in the latter case, HMRC may accept a revaluation within the five year period.

(Gill Steel at a talk on 25 May 2010 in Norwich to CIOT East Anglia/STEP ‘IHT & CGT – Some Particular Problems p 9)

2. Reservation of Benefit: Can There be a Transfer of Value Which is not a Gift?

HMRC argue that in certain circumstances there can be a transfer of value for IHT purposes which is not a gift - IHT Manual at paragraph 14315:

"The Gift With Reservation (GWR) provisions can only apply if there has been a gift. There is no definition of ‘gift’ in FA 86 s 102 or FA 86 Sch 20 so the word must be given its ordinary meaning. A gift will usually be a transfer of value but need not be. For example

• the grant of an interest-free loan (IHTM 14317)
• if a donor creates a settlement in which they have a qualifying interest in possession, that is a gift (of the reversionary interest) but not a transfer of value.

Example

A husband and wife, A and B, and their son C are in partnership. A and B feel that C is working the hardest and making a substantial contribution to profits, so they transfer a sum from their capital accounts to him to recompense him for his additional efforts.

If the transfer was commensurate with the additional contribution C was expected to make, then, because the transfer did not confer any gratuitous benefit on C, it is not a gift and therefore cannot be a GWR. However, in practice you should not assume that the transfer was so commensurate. You would deal with the case initially on the basis that there was a gift and, if the taxpayer objects, refer to Technical Group for advice.”

As Chamberlain & Whitehouse say in their book Pre-Owned Assets & Tax Planning Strategies (2nd Edition), 2005, Sweet & Maxwell,

‘The fact that such a fundamental point, namely whether someone who settles property on interest in possession trusts for himself has made a gift, demonstrates the difficulty that professionals have in advising their clients on the applicability of the Regime. Unless they can determine whether or not there is a reservation of benefit, they cannot assess whether or not the Regime [i.e., the Pre-Owned Assets Regime] applies.’

(Gill Steel at a talk on 25 May 2010 in Norwich to CIOT East Anglia/STEP ‘IHT & CGT – Some Particular Problems pp 5 & 6)

I find quite puzzling the scenario in HMRC’s example that the parents transfer a capital sum to their son to recompense him for his additional efforts. More likely, surely, would be either a specific salary or an additional profit share?

3. Reservation of Benefit Avoidance: Pre-Owned Assets Charge and Post-Death Events

In respect of both the disposal condition and the contribution condition and whether in respect of land, chattels or intangibles there is a further exclusion which appears in paragraph 16:

"Any disposition made by a person (‘the chargeable person’) in relation to an interest in the estate of a deceased person is to be disregarded for the purposes of this Schedule if by virtue of IHTA 1984 s 17 (changes in the distribution of a deceased’s estate etc.) the disposition is not treated for the purposes of IHT as a transfer of value by the chargeable person."

This will therefore include:

• Variations and disclaimers under IHTA 1984 s 142(1);
• Compliance with the testator’s wishes under IHTA 1984 s 143; and
• Redemption election of the life interest of the surviving spouse on intestacy under Administration of Estates Act 1925 s 37A.

It would seem that the following are not included:

• Disclaimers of settled property under IHTA 1984 s 93;
• Distributions from discretionary trusts created by Will within two years of death under IHTA 1984 s 144; and
• Orders made under l(PFD)A 1975 (IHTA 1984 s 146).

HMRC have confirmed in their Guidance Notes that all instruments of variation to which IHTA 1984 s 142(1) applies will come within the protection afforded by Sch 15 para 16 and therefore not give rise to a POAT charge.

(Gill Steel at a talk on 25 May 2010 in Norwich to CIOT East Anglia/STEP ‘IHT & CGT – Some Particular Problems pp 13 & 14)

Monthly Tax Review

The above is drawn from Matthew Hutton's Monthly Tax Review Notes to support a 90-minute presentation delivered each month in London, Ipswich and Norwich. Matthew offers a complimentary 'taster' session plus a 50% discount for the first six sessions attended thereafter. Please see below for further information.

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MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice. Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT. For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.  
 
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Article Added Sunday, 25 July 2010

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