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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Proportionate charges: calculation of rate before first TYA

Rate {#}

Purely for calculating the rate of tax, the value of the property subject to the exit charge is not relevant. Only the historic values (those at the date of set-up or addition) of the trust itself are considered.

The rate calculation is based on lifetime rates (half death rate), even if the trust was set up under the will of the settlor. The rate of tax payable is then 30% of those rates applicable to a hypothetical chargeable transfer.

Values required {#}

The hypothetical transfer is made up of the total of

  • the historic value of the property comprised in the settlement immediately after it commenced
  • the value (at the date of addition) of any added property
  • the value of property in a related settlement after 27 March 1974 (valued immediately after it commenced)
  • the value of any non-relevant property in the settlement after 27 March 1974 (such as interest in possession or excluded property) (historic value)

These historic values are the figures before any business or agricultural reliefs were given. (IHTM42165)

Add

  • the hypothetical transfer,

to

  • the settlor’s cumulative total of chargeable transfers in the seven years before creation of the trust. (IHTM42255) This only applies for trusts after 27 March 1974.

This is the aggregate chargeable transfer.

Calculate {#}

(Aggregate chargeable transfers  - IHT threshold) x 20% lifetime tax = A tax

Minus (settlor’s cumulative total - IHT threshold) x 20% lifetime tax = B tax

Total tax chargeable at lifetime rate (A tax - B tax) = C tax.

Convert to rate {#}

(C tax ÷  assumed chargeable transfer)  × 100 = effective rate %

Effective rate % x (3÷10) = settlement rate %

Then apply a reduction to reflect the number of quarters that the transferred propertyhas been relevant property. (IHTM42116)

Example

Mr J settles £290,000 on discretionary trusts on 5 June 1999. Before the creation ofthe settlement his chargeable transfers amounted to £90,000. There is no added property and no related settlement.

The trust has risen in value to £400,000 and the entirety is distributed to beneficiaries on 1 February 2006.

Hypothetical chargeable transfer = £290,000                      

Cumulate this with the previous lifetime transfers + £90,000

Aggregate chargeable transfer (ACT) = £380,000

Lifetime tax on ACT:                                      

20 % x (£380,000 - £275,000 (IHT threshold at 1 February 06)) = £21,000

Lifetime tax on lifetime transfers:                            -             

£90,000 transfers are below threshold, so no tax                                              

Effective rate:                                  

(£21,000 ÷ £290,000) × 100 = 7.241%

Settlement rate = 7.241% × (3÷10) = 2.172%       

Chargeable transfer = £400,000 x 2.172% = £8,688                             -

Reduction: relief as property held for 26 quarters,

therefore not relevant property for 14 = £3,040.

Tax to pay is £5,648.                                                        

Assessing {#}

See page IHTM42116 for an explanation of the reduction to apply to reflect the number of quarters the property has been relevant property, and for screenshots of this example using both Compass and the manual assessing template.

Settlements made before 27 March 1974 {#}

See guidance at IHTM42130