Proportionate charges: 'appropriate fraction' reduction for number of complete quarters
Reduction to settlement rate
To arrive at the chargeable rate, multiply the settlement rate by as many fortieths as there are complete successive quarters (3 month periods) in the period beginning with
- the date of the last ten year anniversary (TYA), or
- the date on which the settlement commenced (if exit is before first TYA),
and ending with
- the day before the occasion of the charge.
If less than one quarter has passed since the settlement has commenced or the last TYA, there is no chargeable event. (IHTM42117)
If the property being distributed was an ‘addition’ to the relevant property after the settlement commenced or last TYA, adjust the number of quarters to reflect the number of quarters that have expired before the addition.
If the distributed property has been in the trust for less than one quarter, then you must treat it as relevant property for one whole quarter. (This applies only after the first quarter from commencement of the settlement commenced or the last TYA.) IHTA84/S68 (3)(b) and IHTA84/S69 (4)
Applying the reduction
1) Manual template assessments
Settlement rate % × (number of complete quarters since start date or last TYA ÷ 40) = chargeable rate %
Tax charge is therefore:
Chargeable rate % × chargeable transfer = £IHT to pay
Using the example from page IHTM42114,
Settlement rate = 2.172% × (26 complete quarters ÷ 40) = 1.412%
Tax to pay = £400,000 distribution (no grossing) × 1.412% chargeable rate = £5,648.
Appendix here shows manual template screenshots of this example.
In Compass calculations, the reduction is shown as a relief against the total tax on the settlement rate.
The overall tax charge on the settlement rate is effectively based on 40 quarters, so reduce it by the number of quarters (out of 40) that the that property was not relevant property (in the period between commencement/last TYA and the next TYA). In practice, if the property was held for 30 complete quarters before disposal (as described at “Reduction to settlement rate” above), your relief is based on the remaining 10 quarters.
Settlement rate % × chargeable transfer = £IHT total
Chargeable transfer × settlement rate % × (number of quarters not relevant property ÷ 40) = £relief .
£IHT total minus £relief = £IHT to pay
Compass will calculate the relief for you, but you should check the calculation for accuracy through the RAT button (IHTM31245) and add an explanation of any amendments you make in the assessment notes box.
The appendix here shows screenshots of relief applied using the same example as before.
Settlements made before 27 March 1974
See guidance at IHTM42130.