Section 3: general provisions
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
This is for background information as the application of the statutory provisions relating to Inheritance Tax are the responsibility of HMRC. Where difficulties arise in the interpretation of these provisions, the matter should be referred to CEO.
3.2 Change from Capital Transfer Tax to Inheritance Tax
The FA 1986 made some fundamental changes to the structure of Capital Transfer Tax (CTT) , and in recognition of that the tax was renamed Inheritance Tax (IHT). The IHT provisions are contained in ss.100-107 and Schs 19 and 20 FA 1986, and unless otherwise stated apply to tax occasions occurring on or after 18 March 1986.
3.3 Capital Transfer Tax renamed Inheritance Tax
S.100 FA 1986 provides that, with effect from the date of Royal Assent (25 July 1986), CTT is to be known as Inheritance Tax, and the Capital Transfer Tax Act 1984 (CTTA 1984) may be cited as the Inheritance Tax Act 1984 (IHTA 1984). Where the liability to tax arises on or after 25 July 1986, the tax charged is IHT, and statutory provisions should be cited by reference to the IHTA 1984, not the CTTA 1984. CTT and the CTTA 1984 continue to apply to liabilities arising before that date. However, although the tax is renamed IHT with effect from 25 July 1986, the actual changes to the structure of CTT take effect from 18 March 1986.
3.4 Structural changes to CTT
S.101 and Sch 19 FA 1986 give effect to the structural changes to CTT. S.101(3) FA 1986 provides that these amendments apply to transfers of value occurring on or after 18 March 1986. The main changes are :-
- Abolition of a charge on certain lifetime transfers providing the transferor survives 7 years thereafter (known as a potentially exempt transfer (PET)).
- Introduction of a single table of rate/s of tax (see Appendix 1).
- Reduction in the cumulation period from 10 years to 7 years.
3.5 Basis and nature of tax
Inheritance Tax (IHT) applies to “transfers of value”, ie transfers which reduce the value of the transferor’s estate. Liability arises under s.1 IHTA 1984 and is chargeable on the value transferred by a chargeable transfer. The principle occasions when a charge can arise are dealt with below.
The tax is now charged at a single rate, except that no tax is payable until the total of chargeable transfers exceeds a certain threshold (see Appendix 1).
All immediately chargeable transfers made by a person during their lifetime are liable to tax cumulatively as they occur within a 7 year period. On death, there is a deemed transfer of the deceased’s estate and this, together with any lifetime transfers made within 7 years (including PETs - see para 3.9 below) is liable to tax or additional tax.
Occasions of Charge
3.6 Lifetime gift
Transfers of value to discretionary trusts and transfers involving companies are liable to an immediate charge at half the rate of tax. Additional tax is payable if the transferor dies within 7 years.
A charge arises on a transfer of the deceased’s estate deemed to take place on death (s.4 IHTA 1984) which will include lifetime transfers made within 7 years of death.
3.8 Settled property
Inheritance tax may become payable:
on the termination of an interest in settled property (ss.43-48 IHTA 1984).
on the distribution or deemed distribution of capital out of a discretionary trust (ss.43-48 IHTA 1984).
on the occasion of a ten-yearly periodic charge or a proportionate charge (ss.64 and 65 IHTA 1984).
The definition of a settlement is set out in s.43(2) IHTA 1984. See Section 8 for a more detailed consideration of settled property.
3.9 Potentially exempt transfers
Introduced by para 1 Sch 19 FA 1986 by inserting Section 3A in IHTA 1984.
Outright gifts between individuals (and gifts by an individual into accumulation and maintenance trusts or trusts for the disabled) become exempt from tax provided the transferor survives seven years from the date of the gift. During that seven year period they are called potentially exempt transfers (PETs). (See Section 4 para 4.22 et seq).
3.10 Gifts with reservation
Special rules apply where property is given subject to a reservation, ie where the transferee does not enjoy it to the entire exclusion of the donor. (See Section 4 para 4.35 et seq).
Rates of Tax
3.15 Inheritance Tax
S.7 and Sch 1 IHTA 1984 provides the Table showing the rates of tax payable according to slices of value attributable to any chargeable transfer.
In order to determine the rate at which IHT is payable the cumulative total of any previous chargeable transfers is added to the current chargeable transfer, the final addition or accumulation being made on death.
Appendix 1 indicates the rates of IHT for chargeable transfers made on or after 18 March 1986. HMRC will provide details on request of the rates applicable for transfers before 18 March 1986.
Exemptions and Reliefs
Exemptions continue to apply to IHT as they applied to CTT (see Section 6). Reliefs with which the VOA may be concerned, eg Agricultural, Business, Woodland and Heritage Property are dealt with in separate sections of this Manual.
Valuations are made as at the time of transfer. The general basis of valuation for IHT is set out in s.160 IHTA 1984 and is “the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time”.
This wording is similar to the definition of value used for Estate Duty (ED) and Capital Gains Tax (CGT) and it is considered that the principles of open market value established by the Courts for ED and CGT should apply to IHT. However the measure of value may differ for each.
Whilst various paragraphs in this section necessarily make reference to valuation matters the valuer should consult Section 7 for the valuation assumptions to be made and for a detailed appraisal of Part VI IHTA 1984.
For deaths the relevant time for valuation is immediately before the death (s.4(1) IHTA 1984) and it is provided by s.171 IHTA 1984 that account shall be taken of certain increases or decreases in the value of any property comprised in the deceased’s estate which have occurred by reason of the death. (See Section 4 para 4.65).
A special valuation rule is applied by s.161 IHTA 1984 in respect of “related property” (see Section 15). Briefly property is related to a person’s estate if:-
it is in the estate of the transferor’s spouse; or
it comprises, or has comprised within the preceding 5 years property donated by either spouse after 15 April 1976 to a charity or to one of the political, national or public bodies to which exempt transfers may be made.
Chargeable Transfers - Adjustments by HMRC
3.20 Exemptions, reliefs etc
IHT is based on the value transferred by a chargeable transfer after adjustment by HMRC for any exemptions, reliefs and the addition for “grossing up” (see Section 4 para 4.13) when the transferor pays the tax. Strictly therefore the value reported by the VOA is the value transferred before reliefs and deductions and as if grossing up did not apply.
3.21 Incidental expenses
Incidental expenses incurred by a transferor in making a lifetime transfer (but not the liability for IHT) are left out of account, even though when borne by the transferor they are a loss to the estate.
However if such expenses are borne by a person benefiting from the transfer they are deducted by HMRC from the value transferred (s.164 IHTA 1984).
3.22 Mortgages or charges
Any charge or mortgage upon a property is deducted by HMRC from the value of that property (s.162(4) IHTA 1984).
3.23 Capital Gains Tax payments
The payment by the transferor of any CGT arising out of a lifetime transfer is not taken into account in arriving at the loss to the estate but should the transferee pay the CGT it is deducted by HMRC from the value transferred (s.165 IHTA 1984).