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Matthew Hutton MA, CTA (fellow), AIIT, TEP reports on a possible solution to some situations of uncertainty over the availability of business and agricultural reliefs for inheritance tax purposes.

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The following points were made in a lecture by Emma Chamberlain at IBC’s IHT and Trusts Conference in London on 22 May 2008. 

The Problem

HMRC are notoriously unwilling to pronounce on the availability of APR or BPR where no IHT hangs on the issue (see for example HMRC’s IHT Newsletter August 2006).  Similarly, they will not assist the executors in confirming the extent of such property which should be appropriated to a nil-rate band discretionary trust.  To force the involvement of HMRC there must be a chargeable transfer on which some IHT hangs.  Further, following a death, one must ensure that where there is a surviving spouse there is a specific gift of the property to a chargeable person to avoid the restrictive impact of IHTA 1984 s39A. 

The solution

Taking into account the various uncertainties concerning the availability of relief; the possibility of only obtaining relief on part of the value transferred and the desirability of ensuring that the relief is considered and agreed by HMRC, Emma Chamberlain suggested that the solution is:

(i) establish the usual discretionary trust (commonly called an NRBDT);

(ii) put into that trust the relevant business or agricultural property without a qualification along the lines of ‘provided that it shall qualify for IHT relief’. This will constitute a specific gift of the property within s39A(2) and, because tax will be at stake (the gift is not spouse exempt and will, see below, in all cases exceed the available nil-rate band of the testator) HMRC must then rule on the availability of the relief; and

(iii) add a gift of the nil-rate band (taking care to define this as such sum as would not attract an IHT charge, but ignore for this purpose the gift of the business/agricultural property). This seems desirable:

(a) to maximise property going into the trust; and

(b) to ensure that even if the business/agricultural property is worth no more than £312,000 the issue of relief will be determined by HMRC.

By employing a discretionary trust (falling within IHTA 1984 s144) it will be possible, once the position of APR/BPR has been agreed with HMRC, to take a view on the future of the trust. For instance, if full relief is given, then either the trust may continue or property could be appointed to chargeable persons outright (eg to children/ grandchildren). By contrast, if relief is not available then an appointment to the surviving spouse may be made to obtain the benefit of spouse relief. Provided that the matter is resolved within 2 years of death, reading back will be available; for instance, in respect of the spouse exemption. Note:

(i) whilst APR/BPR disputes can drag on with HMRC over a long period, the majority are settled within 2 years of death. Of course the existence of this deadline should operate to concentrate minds and make sure this happens!

(ii) bear in mind the CGT position if the trust is to be broken up within 2 years of death with IHT reading back. The usual hold-over relief under TCGA 1992 s260 will not be available but this should not matter given that the estate will still be in the course of administration so that the beneficiaries will take qua legatees at probate value;

(iii) thought should also be given to splitting the two gifts and, eg adding the nil-rate band sum to a pilot discretionary trust established during the testator's lifetime. This will mean that both trusts will then benefit from a full nil-rate which will be attractive if the business property is sold so that that trust becomes a cash vehicle; and

(iv) watch the Frankland trap: do not make outright appointments within 3 months of the death.

(Emma Chamberlain lecture notes 22 May 2008)

The 7th Estate Planning Conference: Current Issues 2008 

For the seventh successive year Matthew is running a series of full-day Conferences in 6 venues round the country, in the course of September and October 2008.  

Audience:  Solicitors  Accountants  Tax Advisers  Private Bankers   

Estate Planning continues to be an intriguing and interesting subject.  But it is no mere intellectual exercise.  For our clients, the advice we give and the decisions they make, if not exactly 'life or death', can have far-reaching consequences over a long period of time.  Decided cases and developing HMRC attitudes (with reference to the Manuals, especially) must both be taken into account.  Flexibility is essential in structuring the family assets.   

This series of Conferences will major on developments over the last year or so, putting them into context and drawing out the practical planning aspects.  There will be plenty of time for delegate questions and discussion. 

Price: £295 plus VAT (Concessions: £25 discount for 2007 delegates OR '5 delegates for the price of 4'). 

Dates and Venues: