Transfers on death: unquoted shares - 20% tax test
Unquoted shares or securities that do not represent a control holding (IHTM30217) of a company qualify for instalments if:
- the tax attributable to those shares and securities
- together with the tax on any other instalment option qualifying property (IHTM30212)
- amounts to 20% of the tax on the value transferred by the chargeable transfer on the death
- for which the person paying the tax is liable (IHTM30011) in the same capacity.
The 20% test under IHTA84/S228 (1)(b) and (2) is confined to tax chargeable on the value transferred on the death for which the person paying the tax on the unquoted shares is liable in the same capacity. Accordingly, the procedure to follow is:
- identify the person paying the tax attributable to the unquoted shares or securities and the capacity (e.g. as executor (IHTM05012)) in which that person is paying the tax
- calculate the tax attributable (after any appropriate Business Relief (IHTM25131)) to those shares or securities
- calculate the tax attributable to any other IHTA84/S227 instalment option property (IHTM30191) in the death estate for which the person at i. above is liable in the same capacity
- calculate the total IHT on the death estate for which the person at i. above is liable in the same capacity
- if the total of tax at 2. and 3. amounts to 20% or more of the tax at 4., the 20% test is satisfied.
As executor of the deceased, A is liable for and pays the tax attributable to a holding of unquoted shares which forms part of the deceased’s free estate. In applying the 20% test to the tax attributable to that holding
- any tax for which A may be liable in a different capacity, such as a trustee of an lifetime settlement, is disregarded, and
- the fact that B may also be liable as beneficiary for the tax attributable to the shares (and that if applied to him the 20% test would not be satisfied) is irrelevant if the tax is in fact paid by A.
The detailed facts are:
On the death of T in 2001 the death estate, wholly chargeable, consists of:
Free estate of £300,000; made up of non-instalment option property of £190,000, unquoted shares of £10,000 and a house valued at £100,000.
PET of £242,000 to A becomes chargeable on the death and uses up the nil rate band.
Under T’s Will the unquoted shares are the only benefit taken by B.
The tax on the NQ shares is paid by the executor, A. For the purpose of the 20 % test you have to:
- take into account the tax on all the free estate as A is liable for it as executor
but not tax for which A is liable as
Applying the procedure given at the beginning of this paragraph:
- A is paying the tax as executor
- the tax on the shares is £4,000
- A is also liable as executor for the tax on the house, £40,000
- the total liability of A as executor for tax on the free estate is £120,000
- the combined tax at (b) and (c), £44,000, is more than 20 % of the tax at (d).
So A can pay the tax on the shares by instalments.
The fact that B is also liable for the tax on the shares (and that he would fail the 20% test) is irrelevant.