In this section
6.1 Scope of section
The provisions regarding exemptions and reliefs are very detailed and apart from those which are dealt with elsewhere in this Chapter, are not directly relevant to the DV insofar as valuation is concerned. Only brief details will therefore be given in this Section. Where, exceptionally, the DV is required to become involved in matters included in this Section, the case should be referred to CEO(DVS).
6.2 Forms of exemption and relief
IHT is charged in respect of any property by reference to the value transferred by a chargeable transfer of value. The charge to tax will be reduced in respect of a transfer where any of the following circumstances apply:-
- where a gift is a potentially exempt transfer (PET) and the transferor survives 7 years from the date of the gift (see Section 4 para 4.23); or
- where the property itself is not chargeable to tax (excluded property, see paras 6.4 - 7 below); or
- where the transfer is not regarded as a transfer of value (see paras 6.8 - 14 below); or
- where the transfer of value is not chargeable (exemptions, see paras 6.15-28 below); or
- where the value transferred by the chargeable transfer is adjusted downwards for tax purposes (reliefs, see paras 6.37-40 below).
6.3 Adjustments to be made by HMRC(IHT)
Adjustments for exemptions and reliefs are made by HMRC(IHT); in certain circumstances the adjustments are made on the basis of advice given by the DV, but generally the DV is not involved.
Any instances in which the parties make a claim for exemption or relief directly to the DV should be referred to HMRC(IHT).
By virtue of s.5(1) IHTA 1984 in relation to transfers on death, excluded property is not to be regarded as included in the deceased's estate, and by s.3(2) IHTA 1984 no account is to be taken of the value of excluded property which ceases to form part of a person's estate as a result of a lifetime transfer.
Although the value of excluded property may be of relevance in exceptional circumstances, (for example, where an owner of foreign property changes his domicile to the UK, or where the related property provisions apply) it may generally be assumed that its existence or value may be ignored.
The main types of excluded property are outlined in paras 6.5 to 6.7 below. In practice the identification of such property will be made by HMRC(IHT) who will not include it in a reference to DVs.
6.5 Foreign property
Foreign property not comprised in a settlement and owned by a person not domiciled in the UK is excluded property (s.6(1) IHTA 1984). Foreign property comprised in a settlement, and not being a reversionary interest, is excluded provided that the settlor was not domiciled in the UK at the time the settlement was made, s.48(3) IHTA 1984.
6.6 Certain securities in the ownership of non-residents
Certain British securities, pensions, etc in beneficial ownership of persons neither domiciled nor ordinarily resident in the UK are excluded property, s.6(2) to (4) IHTA 1984.
6.7 Reversionary interests
By s.48(1) IHTA 1984, reversionary interests in settled property are excluded property unless:-
- the reversion has at any time been acquired for a consideration in money or money's worth (Anti-avoidance device to prevent eg a death-bed purchase of a substantial reversionary interest) or
- the reversion is one to which either the settlor their spouse or civil partner is or has been beneficially entitled (Anti-avoidance device to prevent e.g. a husband making a substantial short term settlement on his wife with a reversionary interest to himself, and then transferring that interest to a third party as an exempt reversionary interest), or
- the reversion is the interest expectant on the determination of a lease treated as a settlement by virtue of s.43(3) IHTA 1984 (eg leases for life).
S.48(2) provides that in relation to a reversionary interest under a settlement made before 16 April 1976, s.48(1) IHTA 1984 shall have effect with the omission of paragraph (b) above; and if the person entitled to a reversionary interest under a settlement made on or after 16 April 1976 acquired the interest before 10 March 1981 the subsection shall have effect with omission of the words "or has been" in paragraph (b) above.
6.8 Basic provision
Certain lifetime dispositions, whilst being transfers of non-excluded property, are nevertheless not regarded as being transfers of value, and therefore not liable to IHT. S.3(1) IHTA 1984 defines a transfer of value as "a disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition", and the corollary of this is that a disposition not immediately reducing the value of the transferor's estate is not a transfer of value. Thus while, for example, a sale of a house involves dispositions by both vendor and purchaser, there is no transfer of value where the vendor is paid full market value for the house as there is no diminution in the value of either party's estate. By s.3(1) IHTA 1984, therefore bona fide transactions for full market value are taken out of the scope of the tax.
6.9 Gratuitous intention
A lifetime transfer will not be a transfer of value if there was no gratuitous intention. By s.10(1) IHTA 1984, a disposition will not be a transfer of value if certain conditions are met; these conditions, broadly, are:-
- the disposition was not intended, nor made in a transaction or series of transactions intended, to confer any gratuitous benefit on any person, and either
- the disposition was made in a transaction at arm's length between unconnected persons (irrespective of the price paid), or
- if the transaction was between connected persons, or not at arm's length, the transaction was such as might be expected to be made by unconnected persons at arm's length.
The main situation which s.10(1) IHTA 1984 is intended to exclude is the "bad bargain" case where a commercial transaction (or quasi-commercial transaction between connected persons) proves, after the event, to have been detrimental to the transferor's estate, as for example in the case of a sale at agricultural value of agricultural land which is shortly afterwards found to contain valuable minerals. In such cases, provided the conditions of s.10(1) IHTA 1984 can be shown to have been met, there is no tax liability.
6.10 Revocable gifts
A revocable gift, other than a gift of property into settlement, is not a transfer of value since the property so gifted is treated by s.5(2) IHTA 1984 as forming part of the transferor's estate, and there is therefore no consequential loss to the estate arising out of the gift. A transfer of value does, however, take place if the power of revocation is relinquished.
6.11 Gifts with reservation (GWR)
Under the GWR provisions the gift is treated as a transfer of value when either the reservation ceases or the donor dies (s.102 FA 1986) (Section 4 para 4.35). A gift chargeable under these rules may also be chargeable when made under the normal rules. The double charges regulations prevent there being a double charge (see para 6.41).
6.12 Dispositions for maintenance of family
By s.11 IHTA 1984, lifetime gifts whose purpose is to provide for the maintenance of a spouse or civil partner or former spouse or civil partner are not regarded as transfers of value. Similarly, gifts for the maintenance of children (including step-children, adopted children, etc) of the transferor or their spouse or civil partner are not transfers of value provided the child is under 18 or undergoing full-time education. A gift to any other "dependent relative" as defined is also not a transfer of value to the extent that it is a reasonable provision for the relative's care or maintenance.
6.13 Deeds of family arrangement
By s.17 IHTA 1984 transfers executed under a Deed of family arrangement or similar instrument, to which s.142 applies and which seek to redistribute the estate of a deceased person amongst the beneficiaries within two years of the death, are not transfers of value.
6.14 Expenditure allowable against Income or Corporation Tax
S.12 IHTA 1984 provides that a disposition is not a transfer of value to the extent that it would be allowable against the transferor's profits or gains for income tax or corporation tax purposes. In particular, employer's contributions to pension schemes (including the grant of a residential tenancy at less than full rent to a retired employee or their dependents which is treated as a pension being equivalent to the extra rent obtainable on an arm's length letting) are not transfers of value.
A transfer which is a transfer of value is not necessarily a "Chargeable transfer of value". A transfer of value which is not chargeable, and is therefore not subject to tax (s.2 IHTA 1984), is known as an exempt transfer.
Certain transfers are generally exempt, others exempt only in cases of lifetime transfer or on death, and special provisions apply with regard to settled property. The various heads of exemption are set out in paras 6.16-34 below.
6.16 Transfers between spouses or civil partners
Transfers between husband and wife, or civil partner in life or on death, whether of settled or free property, are exempt. The only limitation to this exemption occurs where the transferor is domiciled or is treated as domiciled under s.267 in the UK and the spouse or civil partner abroad, in which case the exemption only applies to a limit of £55,000.
6.17 Lifetime transfers: annual exemption (s.19 IHTA 1984)
The first £3,000 of the value transferred by a transferor's lifetime gifts in any one income tax year (ie April 6 to April 5) is exempt.
Where any portion of the annual exemption is unused in the year to which it pertains, it may be carried forward to the following year but no further.
There are special rules for calculating the exemption where agricultural or business reliefs apply.
6.18 Lifetime transfers: small gifts (s.20 IHTA 1984)
Up to £250 of the value transferred by outright gift in one year (ie not into settlement) to any number of recipients is exempt.
6.19 Lifetime transfers: normal expenditure out of income (s.21 IHTA 1984)
A transfer is exempt if it forms part of the normal expenditure out of the transferor's income, irrespective of the size of the transfer. In order to qualify for this exemption the transferor must show that the expenditure is normal and habitual, that it is made out of income (ie is not a grant of, or out of, a capital asset), and that the transfer does not leave the transferor insufficient income to maintain his or her usual standard of living.
6.20 Lifetime transfers: wedding gifts (s.22 IHTA 1984)
There is an exemption for gifts made in consideration of marriage, the extent of the exemption depending upon the relationship of the transferor to the parties to the marriage. The exemption is allowable only once for any one transferor in relation to any particular marriage, although a transferor may claim the exemption any number of times in respect of different marriages.
6.21 Charities (s.23 IHTA 1984)
Transfers to charities or charitable trusts are wholly exempt (although in relation to deaths before 15 March 1983, there was a limitation of the extent of the exemption). There are however certain circumstances when the exemption will not apply (s.23(2) to (5)).
6.22 Political parties (s.24 IHTA 1984)
Transfers of value on or after 15 March 1988 to political parties, whether by lifetime gift or on death, are exempt with no limitation on value (s.137 FA 1988). Prior to 15 March 1988 there was a limitation of £100,000 unless gifts were made one year or more before the donor's death. A political party qualifies for exemption if at the last general election before the date of transfer:
- two members of that party were elected to the House of Commons, or
- one member of that party was elected to the House of Commons and not less than 150,000 votes were given to candidates who were members of that party.
(The availability of the exemption is subject to various exceptions (see para 6.27).
6.23 Registered housing associations (s.24A IHTA 1984)
Transfers to registered housing associations (RHAs) made on or after 14 March 1989 are wholly exempt in so far as they relate to land within the United Kingdom (s.171 FA 1989).
The availability of the exemption is subject to various exceptions (see para 6.27).
6.24 Gifts for national purposes (s.25 IHTA 1984)
Transfers of value, whether by lifetime gift, on death, or by distribution from a discretionary trust, are exempt to the extent that the value transferred is attributable to property transferred to certain public bodies listed in Sch 3 IHTA 1984. The listed bodies include, inter alia, local authorities, government departments, the National Trust, universities, and the National Museums and Galleries.
The availability of the exemption is subject to various exceptions (see para 6.27).
6.25 National Heritage property: gifts for the public benefit (s.26 IHTA 1984)
This exemption was repealed by section 143 FA 1998.
6.26 Property of historic interest : (ss.30 and 31 IHTA 1984)
The exemption may be extended by ss.30 and 31 IHTA 1984 to transfers where Heritage property remains in private ownership. The following conditions must apply:-
- the property has been designated as being suitable by the Treasury (s31)
- b) i. Lifetime
If the transfer is other than on death then the transferor, their spouse or civil partner, or the discretionary trust as appropriate, have been beneficially entitled to the property for a period of six years immediately prior to the transfer. This does not apply if the transferor etc. acquired the property on a death where the property was exempted under these provisions.
The rule on period of ownership at I above does not apply to a transfer on death.
The exemption is conditional, since tax will be payable immediately a "chargeable event" occurs. A chargeable event will occur if the undertakings are broken, the property is sold other than to a "National Purposes" body (see para 6.24 above), or the property is transferred in life or on death other than by way of a further conditionally exempt transfer.
(See Section 20 for further advice in respect of National Heritage property.)
6.27 Occasions on which certain exemptions do not apply
The exemptions set out at paras 6.21 to 6.26 above will not generally apply in any of the circumstances listed below (s.26(7) IHTA 1984):-
- where the gift is postponed;
- where the gift is conditional;
- where the gift is defeasible (annulled);
- where the gift is for a limited period only;
- where the transferor retains an interest in the property;
- where the property is settled property comprised in a settlement held on interest in possession trusts and either the settlement does not then come to an end or an interest under the settlement has been purchased by an exempt body;
- where the property may become applicable for purposes other than the purposes of the charity, public body, etc.
6.28 Mutual transfers
The provisions of ss.148 and 149 IHTA 1984 do not apply if the donee's transfer is made on or after 18 March 1986 (para 25 Sch 19 FA 1986) and consequently neither the mutual transfer exemption for the donee's gift (s.148) nor the relief for the donor's gift (s.149) will be available for IHT purposes.
6.35 Interest in possession
Where a transfer of value consists of an interest in possession in settled property, the exemptions set out at paras 6.16, 6.21 - 6.25 above (subject to the reservations set out at para 6.27) are applicable. The exemption for gifts for the maintenance of a persons's spouse or civil partner, children and dependent relatives (paras 6.12 - 6.14 above) is available where the person disposes of an interest in possession but not where it comes to an end. The annual and wedding gifts exemptions (paras 6.17 and 6.20 above) are available in respect of interests coming to an end or disposed of on or after 6 April 1981.
6.36 Without interests in possession ("discretionary trusts")
In relation to events after 8 March 1982, where a transfer is made out of a discretionary trust, the spouse exemption and general exemptions on lifetime gifts are not applicable, but the exemptions for transfers to charities, etc (paras 6.21 - 6.26 except para 6.23 (RHAs) above) will apply. However transfers out of special types of trust e.g. Bereaved Minor Trusts and charitable trusts, are exempt.
The term 'relief' applies to cases where there has been a chargeable (ie non-exempt) transfer of value, but tax is not charged on the full value transferred.
6.38 Quick succession relief
Where IHT is chargeable on death in respect of property which was the subject of a chargeable transfer within the five years previous to the death, relief is provided by reducing the tax payable on the death by a proportion of the tax payable on the earlier transfer. The proportion tapers at 20% intervals from 100% if the previous transfer took place within 12 months of the death, to 20% if it took place between 4 and 5 years before the death.
A similar relief in respect of settled property is given subject to conditions where property is chargeable to tax within five years of a previous charge.
6.39 Double taxation relief
Relief may be available in certain circumstances where a chargeable transfer is subject to capital taxation by another country with whom a double taxation agreement has been concluded or it may be available under the "unilateral" provisions of s.159.
6.40 Other reliefs
Relief may also be available in the following cases:-
- Agricultural property (see Section 9).
- Non-agricultural woodlands (see Section 10).
- Business property (see Section 11).
- Falls in value of property after a transfer (see Sections 12 to 14).
6.41 Double charges relief
Transfers or other events occurring after 17 March 1986. Regulations [S.1 1987 No 1130] made under s.104 FA 1986 provide relief from double charges to tax where (broadly):-
- a PET proves to be a chargeable transfer and the transferor's death estate includes property given to him or her by the transferee;
- property which is the subject matter of a chargeable transfer is also caught by the GWR provisions (see para 6.11);
- in valuing a death estate a liability is abated under s.103 FA 1986 by reference to a chargeable transfer of value made by the deceased to the creditor; and
- property, which was the subject matter of a chargeable transfer, was re-acquired by the deceased (transferor) within seven years from the transferee.