Chapter: 2 - Inheritance Tax Mitigation: The Basics

Death

2.1.2

On death the deceased is treated as if immediately before he died he had made a transfer of value equal to the value of his estate immediately before his death (IHTA 1984 s4(1)). The estate includes all the property to which he is beneficially entitled (IHTA 1984 s5). This will include certain, but not all, interests in possession under a trust (see 2.1.6). Liabilities may be deducted provided either they were imposed by law or were incurred ‘for a consideration in money or money’s worth’. Such a deemed transfer of value on death may be exempt, for example on passing to a surviving spouse/civil partner or to charity, or it may be chargeable. If chargeable it may be subject to a relief at either 50% or 100% for qualifying business and agricultural property or, to the extent that the chargeable value exceeds the prevailing nil-rate band (£312,000 in 2008/09), it will attract tax at 40%. Any balance of the nil-rate band not taken up by chargeable transfers made in the seven years before death will reduce the IHT otherwise attracted by chargeable transfers on death. Where with a married couple or registered civil partnership all or part of the nil-rate band on the first death is unused, the unused proportion can augment (up to 100%) the nil-rate band on the death of the survivor after 8 October 2007 (see 18.4.3).

A 2008 Special Commissioner’s case considered the impact on the valuation of minority holdings in two companies of rights over those shares (Executors of McArthur deceased v HMRC SpC 700).  Mr McArthur had made loans to the companies and had received an option to convert the loans to £1 ordinary shares at par as a substitute for repayment in cash.  The loans were repayable on demand, but Mr McArthur had neither demanded the loans nor exercised the conversion options by the time of his death.  Had he chosen to exercise the options immediately before his death, he would have had a majority holding in the companies, neither of which was eligible for business property relief.  The executors argued that the options had ceased to exist at Mr McArthur’s death, or if they had not, that there should be a discounting effect on valuation.  Special Commissioner J Gordon Reid QC, agreeing with HMRC, held that the loans and related conversion rights or options were valid, subsisting and enforceable immediately prior to the death; there was more than sufficient evidence in the books and records of the companies to prove the existence of the loans and conversion rights.  By way of comment, presumably had Mr McArthur exercised either option at a time when the shares were worth more than par, he would have enjoyed an immediate increase in the value of his estate.  Further, had the point been spotted before his death and the options terminated, there would presumably have been a chargeable transfer at that point.  I do not know if the case is going to appeal, but there is an obvious moral in terms of ensuring that there are no such arrangements between a shareholder and the company or, if there are, that the tax analysis has been thought through.  [24 October 2008]