Chapter: 2 - Inheritance Tax Mitigation: The Basics

Death

2.1.3

(a) The deemed transfer of value
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 2.3.3). 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 (£325,000 in 2009/10), 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) – the so-called ‘transferable nil-rate band’.

(b) Changes occurring on death
A person’s estate may be subject to changes which occur on account of the death.  Where such a change is an addition to the property in the estate, or an increase or decrease of a value of any such property, such changes are treated as if they had occurred before the death (IHTA 1984 s171).  Expressed exceptions to this principle are alterations in the capital of a close company within IHTA 1984 s98 and the passing of an interest by survivorship under a joint tenancy.  This means, for example, that a decrease in the value of the pre-death property which is triggered by the death, for example personal goodwill in a sole trade which dies with the deceased (albeit otherwise attracting business property relief), is excluded from the death estate. 

A similar candidate might be an option over property which comes to an end on death.  That was the argument raised by the executors of Mr McArthur in relation to options to convert unsecured loans to two companies to £1 ordinary shares at par.  The effect of exercise of the options immediately before death (or before) would have been to create a majority holding in the companies neither of which attracted business property relief.  The Special Commissioner agreed with HMRC and held that both the loans and the related conversion rights or options were valid, subsisting and enforceable immediately before the death  (McArthur’s Executors v RCC [2008] SSCD 1100 (SpC 700)). 

TAX TIP: Be sure, in advising on estate planning, to identify the existence of any options (especially in relation to shares in companies which do not attract business property relief) which have a value and take steps accordingly.  At least, in the McArthur case mentioned above, the exercise of the options after his death (within whatever was the permitted period) would have occasioned an increase in the value of the shares.

(c) The Estate Duty surviving spouse exemption
Where Estate Duty was paid (or would have been payable but for reliefs or the threshold) on the death before 13 November 1974 of the first spouse to die and the survivor has a life interest under the Will, no IHT is chargeable on the second death (IHTA 1984 Sch 6 para 2). However, the related property rules may affect the chargeable value of the free estate or other property taxed on death.

Note that there will also be no IHT implications arising from an inter vivos termination of the life interest (even if death follows within seven years), though in that event the CGT-free uplift on death would have been wasted.

A claim to the Estate Duty transitional relief failed in circumstances where the estate of the husband (who died in 1969) was left to the wife outright.  She vainly tried to argue that there was a legally enforceable secret trust under which on the wife’s death the property in question would be left to their two daughters.  The First-tier Tax Tribunal (Judith Powell) held that there was no evidence for that argument, nor indeed for the alternative assertion that the 1965 Wills made by the spouses were mutual Wills, so that on the husband’s death the widow held the relevant property on a constructive trust for the daughters.  (Davies and another v RCC (2009) TC 106)

TAX TIP:  An ‘Estate Duty protected life interest’ should be kept in place until the death of the survivor.  The fund will be free from IHT and the acquisition cost of the assets will be market value, with the CGT-free uplift in value on death.