Step 1 - the starting value of specific gifts: circular situation
Occasionally you may have a gift of a sum equal to the beneficiary’s Inheritance Tax liability at another title. Where the value of that gift is dependent upon the amount of an exemption this is known as a circular situation.
If you have such a case you should
- refer to the Actuarial Team via your manager
- set out the facts and values of the various ‘gifts’ ., and
- have agreed the values of all the other gifts before making the reference (exceptionally you may make it earlier if your manager considers it essential for the purposes of a provisional assessment)
The example below illustrates how a circular situation can arise.
Andrew dies leaving an estate of £2m.
By Will he gives a pecuniary legacy of £300,000 (free of tax) to his son and the residuary estate to his widow.
Andrew also has an interest in possession in settled property worth £500,000 which passes to his daughter. In his Will Andrew directs his executors to pay the daughter an amount (free of tax) equal to the tax on the settled property.
The payment to the daughter is a pecuniary legacy. But the amount of it cannot be calculated directly because
- it is equal to the tax on the settled property
- the tax on the settled property is dependent upon the total value of the chargeable estate
- the total value of the chargeable estate is dependent upon the chargeable value of the free estate
- the chargeable value of the free estate is dependent upon the amount of the payment to the daughter