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Monthly Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author and presenter of Monthly Tax Review, highlights recent IHT double charges relief regulations and procedural points on form IHT 205.

The Pre-Owned Assets Regime: Further Double Charges Regulations Made

Context

Dawn Primarolo announced on 21 July 2005 that further double charges relief would be given where a double trust scheme (only) had been made and was unscrambled pursuant to the terms of the trusts - as opposed to electing into GWR under FA 2004 Sch 15 para 21. A question was raised in the House on 24 October as to the progress of these regulations, to which the response was ‘HMRC were currently finalising the regulations’. They have now finally appeared!

The Inheritance Tax (Double Charges Relief) Regulations 2005

The new regulations come into force only on 4 January 2006. They apply where 4 specified conditions (A – D) are met.

A: An individual (‘the deceased’) enters into an arrangement (‘the arrangement’) under which:

(a) The disposal condition or the contribution condition is met as respects the relevant property; and

(b) The deceased makes a transfer of value as a result of which a third party becomes entitled to the benefit of a debt (‘the debt’) owed to the deceased.

B: Before the deceased’s death, any outstanding part of the debt is wholly written off, waived or released, and the write off, waiver or release is made otherwise than for full consideration in money or money’s worth.

C: The deceased dies on or after 6.4.05.

D: (a) On the deceased’s death, the transfer of value treated as made immediately before the deceased’s death included the relevant property (or any property then representing the relevant property), and
(b) As a result of the deceased’s death, the transfer of value referred to at A(b) above has become a chargeable transfer

Avoidance of double charge: amounts to be calculated

Amount A is the total tax chargeable as a consequence of the death, but disregarding the value transferred represented by the relevant property (or by any property which, at the time of death, represents the relevant property).

Amount B is the total tax chargeable as a consequence of the death of the deceased, but disregarding the value transferred by the transfer of value specified at A(b).

The total tax chargeable is reduced to the greater of Amount A and Amount B.

(SI 2005/3441 made 14.12.05)

Excepted Estates and Form IHT 205

Context

A new regime for excepted estates has applied since 1.11.04.

Purpose of the IHT 205

It has been suggested in the national press that the primary purpose of the IHT 205 (C5 in Scotland) is to gather data about all estates, so that assets can be traced through to the estates of surviving spouses (or civil partners). HMRC reassure agents and taxpayers that this is not the case. The primary aim of the IHT 205/C5 is to take everyone through the filters which should be applied in deciding whether an estate qualifies as an excepted estate. If an estate successfully passes the test, recording the evidence in support of that conclusion provides reassurance for all concerned that an excepted estate grant has been applied for correctly.

HMRC make use of that same information to monitor the operation of the excepted estates regulations and can do so without troubling the PRs any further. They need to contact the PRs only where they consider that there is a risk to tax. Other than estates which are selected for review under HMRC’s monitoring or which subsequently become tax-paying, the information recorded on the IHT 205/C5 is not indexed or entered on any IT systems.

Three procedural points

There is no need to report alterations to the information provided on the IHT 205/C5 unless these give rise to a tax liability. Where a liability does arise, the adjustments should be recorded on a corrective account (form C4) which should be sent to HMRC with a copy of the IHT 205/C5.

If any property included in an excepted estate is sold, there is similarly no need to provide details of the sale unless this gives rise to a tax liability. The value originally included in the IHT 205/C5 is not ‘ascertained’ for CGT purposes. Unless there is a liability, there is no need for HMRC to agree whether the sale price should replace the value returned. The agent will need to deal with any CGT implications of the sale with the appropriate inspector of taxes.

Unless a corrective account is delivered, an application for clearance using form IHT 30 is not appropriate for an excepted estate. Regulations contain an automatic clearance once the prescribed period has expired and that clearance holds good, even if there are alterations to the value of the estate, as long as the estate continues to qualify as an excepted estate.

(HMRC IHT Newsletter December 2005 p 2)

January 2006

Matthew Hutton MA, CTA (fellow), AIIT, TEP

About Monthly Tax Review (MTR)

MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work. Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items. The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work.

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