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TaxationWeb by Burges Salmon LLP

Burges Salmon LLP outline three points of practice regarding Inheritance tax, Industrial Buildings Allowance and exit charges on migration.

Inheritance Tax and Pension Simplification – the discussion paper

HM Revenue & Customs issued a discussion paper on 21 July 2005 on the application of Inheritance Tax ("IHT") to the new situations arising under the simplified pensions regime due to come into effect on 6 April 2006.

IHT legislation

IHT is generally payable on death and on gifts made during the seven years prior to death. A gift does not only include actual gifts, but also gifts where a person omits to exercise a right and somebody else benefits as a result. Where this happens, the person is treated as making a gift on the last date they could have exercised the right (IHTA 1984, s 3(3)). There is an exception if it can be shown that the omission was not deliberate.

There is a general exemption for any gift which is not intended to confer ‘gratuitous benefit’ on another person and is made in a transaction either at arm's length or on arm's length terms (IHTA 1984, s 10).

Application to pension rights

Section 3(3) is potentially applicable where a person dies having deferred their right to take their retirement benefits. The current pension rules however allow limited choices and pension members are obliged to take their retirement benefits no later than age 75.

Therefore, except in cases where members make a choice to defer taking a pension when their life expectancy is seriously impaired, the current practice is to conclude that members are deferring taking a pension in order to take a higher pension when ultimately paid, rather than avoiding taking one altogether with a view to leaving their fund intact at death. Thus the s10 exemption will apply.

Pension choices after 6 April 2006

Under the new regime there will be a greater freedom of choice as to how pension benefits can be received, including the ability to defer beyond age 75. The discussion paper therefore suggests that a charge under section 3(3) is more likely to apply.

It is proposed that the onus will be on the personal representatives to show that the deceased member's choice not to commit to a regular pension meets the s10 exemption. This proposal seems wholly unworkable as in most cases the PRs will have no idea why the deceased chose to delay drawing a pension. We have made this observation together with other comments in our response to the paper. It is hoped that HMRC will have regard to such representations when formulating their new practice. The consultation closes on 30 September 2005.

Industrial Building Allowances – non-qualifying parts

It may be possible at a later date to obtain Industrial Building Allowances (‘IBAs’) on a non-qualifying part of a property even if originally it represented more than 25% of the total cost of the property.

Where only part of a property is used for a qualifying trade, IBAs are only available on the whole of the property if the non-qualifying part represents no more than 25% of the total cost of the property.

If the non-qualifying part represents more than this, IBAs can only be claimed on the expenditure attributable to the qualifying part. The position however may change if the property is extended during its 25 year tax life and all the expenditure, or a significant part of it, is on the qualifying part of the property.

The percentage of the total construction cost (original cost plus extension expenditure) attributable to the non-qualifying part should be reviewed again. If it now falls within the allowable de-minimis limit IBAs can be claimed on the entire property. The IBAs on the expenditure relating to the non-qualifying part can only be claimed for the remaining tax life of the property from the date on which it falls within the de-minimus.

Exit charges on migration – contrary to freedom of establishment?

The ECJ decision in the case of de Lasteyrie du Saillant (C-9/02) concerning an exit tax on unrealised capital gains may have implications in the UK.

The ECJ held in this case that a French exit charge on an individual transferring his residence outside France was contrary to the freedom of establishment principle. It was found that the charge could not be justified in any of the ways that had been proposed, which included prevention of tax avoidance and of the fiscal erosion of the tax base.

In the light of this case the European Commission is examining the exit tax of other Member States with a view to ensuring their compliance with the Treaty. It has initiated infringement procedures against Germany in respect of its exit tax provisions.

In the UK, under section 185 TCGA 1992, there is an exit charge on companies ceasing to be resident in the UK. Therefore the Commission may seek to challenge this as contrary to freedom of establishment, particularly as it is very general in its application and catches every situation of change in tax residence, not just those which have a tax avoidance purpose.

September 2005

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