Modified 16 June 2010
4.60 Replacement of Capital Transfer Tax by Inheritance Tax
The FA 1986 introduced Inheritance Tax (IHT) with effect from 25 July 1986 (actual changes to the tax structure have effect on or after 18 March 1986). See Section 3.
4.61 Transfer of value on death
By virtue of s.4(1) IHTA 1984 "On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death."
4.62 Meaning of estate
The wording of s.4(1) IHTA 1984 means that the value transferred comprises the value of the deceased's entire estate. For the purpose of this section a person's "estate" is defined in s.5(1) IHTA 1984 as "the aggregate of all the property to which he is beneficially entitled, except that the estate of a person immediately before his death does not include excluded property" (see para 4.64). "Property" by s.272 IHTA 1984 "includes rights and interests of any description" and by s.5(2) IHTA 1984 it includes non-settled property over which a person has power to dispose as they please. A person with an interest in possession in settled property (e.g. a life tenant) is by virtue of s.49(1) IHTA 1984 (as amended by the Finance Act 2006) treated as beneficially entitled to the property in which the interest subsists, so that such property will form part of that person's estate on death.
4.63 Interests in possession in settled property reverting to the settlor, the settlor's spouse or civil partner, or the settlor's widow or widower or surviving civil partner
Where the interest in possession reverts to the settlor on the death of a life tenant during the lifetime of the settlor, s.54(1) IHTA 1984 provides that the value of the settled property shall be left out of account in valuing the life tenant's estate, unless the settlor had acquired a reversionary interest in the property for money or money's worth.
By s.54(2) (as amended by FA 2006) where the settlor's spouse or civil partner, or if the settlor has died less than 2 years earlier, the settlor's widow or widower or surviving civil partner becomes beneficially entitled to the property and is domiciled in the UK at the time of death and neither the settlor nor the settlor's spouse or settlor’s civil partner (or the widow or widower or surviving civil partner) had acquired a reversionary interest for money or money's worth, the value of the settled property shall be left out of account in valuing the life tenant's estate.
4.64 Excluded property
Excluded property is property which is not to be charged to IHT although it might otherwise be so liable. What property is excluded property is a matter for HMRC to decide by reference to ss.6 and 48 IHTA 1984. Generally property outside the UK is excluded if the owner is, or in the case of settled property the settlor, at the time of making the settlement, was domiciled outside the UK (see ss.6, 48 and 267 IHTA 1984). Certain miscellaneous types of property set out in ss.6 and 48 IHTA 1984 are also excluded. Other exclusions (see ss.55(1) and 48(1) IHTA 1984) are rendered necessary because of the manner in which settled property is brought within the scope of IHT. (See Section 8).
4.65 Time of valuation and certain changes in value in deceased's estate due to the death
The time of valuation is immediately before death but regard must be had to s.171 IHTA 1984. By virtue of this section increases or decreases in the value of the property comprised in the deceased's estate which have occurred by reason of the death shall be taken into account as if they had occurred before the death. Also if the death has resulted in an addition to the property comprised in the deceased's estate (such as damages becoming payable in respect of the deceased's loss of life or an insurance policy maturing on death) the consequent increase in the value of the estate is assumed to have occurred before the death. S.171 IHTA 1984 in addition provides that in determining the value of a person's estate immediately before death no account is to be taken of any changes in the value of the estate which result from the termination on death of any interest (e.g. a life interest in settled property) or the passing of any interest by survivorship (e.g. the interest of a joint tenant). If, during the course of negotiations, the parties claim that the value of an interest has been affected by reason of the deceased's death and that s.171 should apply, the HMRC caseworker should be advised of the circumstances and action in respect of that item should be postponed pending further instructions.
4.66 Transfers within 7 years before death
Sections 131-140 IHTA 1984 provide for relief where there has been a fall in value of property transferred by a lifetime gift within the 7 years prior to the death of the transferor (see Section 13).
4.67 Sales within 4 years and compulsory acquisitions within 3 years after death
Ss.191-197 IHTA 1984 give relief where:-
- an interest in land is sold within 3 years after death at a price lower than the value on death;
- an interest in land is compulsorily acquired at any time after death pursuant to a notice to treat served before death or within 3 years afterwards. (See Section 12).
S.199 Finance Act 1993 inserted section 197A into the IHTA 1984 which treats certain sales within a fourth year as having been made within the original three-year period. The period for compulsory acquisitions is unchanged.
4.68 Sales within 3 years after death of property valued with "related property"
S.176 IHTA 1984 gives relief if property is sold within the appropriate period at less than its value at death where that value was arrived at under the "related property" provisions (s.161) or in conjunction with other property in the deceased's estate. (See Section 12). The appropriate period is 3 years.
As between commorientes (those dying together) ss.4(2) and 54(4) IHTA 1984 provide that where it cannot be known which of two or more persons who have died survived the other or others they shall be assumed to have died at the same instant. These sections were enacted to prevent a multiple charge to tax when, for example, a widow and her son die simultaneously in an accident, the widow having bequeathed the whole of her estate to her son. The normal legal presumption in such circumstances is that the younger person is presumed to have survived the older.
4.76 Mortgagee's interest
When a person dies possessed of a mortgagee's interest in any property, the advice of the VOA should be restricted to the unencumbered value of the property constituting the security.
4.77 Mortgagor's interest
Where the property transferred on a death is subject to a mortgage, the mortgage should be ignored in assessing the value transferred.
4.78 Property subject to a restriction against disposal or an option
See para 4.42 hereof.
4.79 Deceased's property not referred to VOA
If the caseworker is aware that the deceased had an interest in property which has not been included in the schedule of properties referred for valuation, but which ought to form part of the estate for IHT purposes, the HMRC caseworker should be advised of the relevant details.
Any existing reference concerning the estate should not be delayed.