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HMRC internal manual

Inheritance Tax Manual

Pre-owned assets: calculation of the charge on intangibles: introduction

Where a charge arises under FA04/Sch15/Para 8 in respect of the whole or part of a year of assessment, an amount equal to the ‘chargeable amount’ is to be treated as income of the individual and subject to income tax, FA04/Sch15/Para 8(3).

The chargeable amount is defined in FA04/Sch15/Para 9(1) as N minus T where

  • N is the amount of the interest that would be payable for the taxable period if interest were payable at the prescribed rate on an amount equal to the value of the relevant property at the valuation date. The ‘prescribed rate’ is the official rate of interest at the valuation date under ITEPA2004/S181,

The prescribed rate was set at

5% for 05/06 and 06/07,

6.25% for 07/08 and 08/09,

4.75% for 09/10, and

4% for 10/11 & 11/12.

Table 2 at HM Revenue & Customs: Rates and allowances - interest rates contains the up to date list for the official rate. External customers can view this table at http://www.hmrc.gov.uk/rates/interest-beneficial.htm

T is an allowance for the amount of any income tax or Capital Gains Tax payable by the chargeable person in respect of the taxable period by virtue of any of the following provisions

  • ITTOIA05/S461 & S624,
  • ITA07/Ss720 - 730, and
  • TCGA92/S77 or S86

so far as the tax is attributable to the relevant intangible property.

Example

Andrew is the UK resident and domiciled settlor of a non-resident settlor interested settlement. The settled property does not form part of his estate nor has he reserved a benefit in the settled property. The settlement comprises ‘intangible’ property of cash and shares with a value of £1,500,000 at the valuation date.

In the tax year 2005/06 the trustees receive income of £20,000 which is chargeable to income tax on Andrew under ITTOIA05/S624. A further £150,000 chargeable gains are realised which are deemed to be Andrew’s gains by virtue of TCGA92/S86.

This means that £8,000 in income tax is payable (£20,000 ×40%) £60,000 in CGT is payable (£150,000 × 40%). The tax allowance (T) against the potential charge under FA04/Sch15/Para 8 is therefore £68,000.

The chargeable amount (N) is 5% (the prescribed rate in 2005/06) × £1,500,000 = £75,000, so that the tax charge under FA04/Sch15/Para 8 is on £7,000.