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Matthew Hutton MA, CTA (fellow), AIIT, TEP considers the potential scope of the inheritance tax business and agricultural property relief clawback provisions.

{mosimage}Context

One of the apparent problems in the recent Nelson Dance case was the issue of the claw-back of relief in the event of the transferor’s death within seven years (which happened) under IHTA 1984, s 113A.

Adrian Baird of the CLA has referred me to an interesting analysis, apparently accepted by HMRC, that the claw-back presents no problems where the net relief value of the gift at outset is within the transferor’s nil-rate band.

Adrian’s example

Suppose Giles, who has never made a transfer, makes a chargeable transfer to a settlement today of business property worth £318,000 on which BPR of 100% is due.  He then dies say five years later when the NRB is, say, £350,000.  His estate at death is £350,000, which is all left to a surviving nephew.  Now suppose the trustees have meanwhile sold the business property, and not replaced it, and have invested the proceeds in shares which, at the date of death are worth £350,000.

Tax analysis

1.  At the point of the gift into settlement Giles makes a chargeable transfer of nil because £318,000 of property transferred is reduced by 100% BPR and, accordingly, has a taxable value of nil.

2.  When Giles dies s 113A(2) now applies. So for the purposes of s7(4) we now need to compute whether the additional tax is greater than the tax charged at the date of the gift (which is nil).  Accordingly s 113A(2) tells us for this purpose we assume BPR is not due as the trustees no longer hold the business property.  However, after two annual exemptions the value transferred of £312,000 is less than the NRB at death of £350,000 and hence the taxable value transferred is nil. 

Conclusion: there is no additional tax.
 
3.  The question now arises as to whether Giles's estate at death is reduced by an NRB of £350,000 or by an NRB of £38,000 - this, to Adrian’s mind is the key point.  Had the lifetime transfer been a PET the NRB for the estate at death would clearly be £38,000. However, because s 113A(2) - and its equivalent s 124A(2) only applies the 'clawback' for the purpose of computing the additional tax and because of conclusion (1) above there is no additional tax and therefore no clawback, the NRB at death is £350,000. 

Conclusion

So the key point is whether any additional tax is due and that is dependent upon the cumulative total (as revised because of death) at the time of the transfer and the nil-rate band at death (Adrian labours this point, because it is not that the chargeable transfer is within the nil-rate band when made that is the key point).

(Email to me from Adrian Baird 27.7.08)

Comment

Acceptance by HMRC of the analysis is understood to be implied (albeit not stated in terms) in the Inheritance Tax Manual at IHTM 24180 and 25386. 

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