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Minutes of IHT and TACT Meeting 11 Feb 2010
Minutes of IHT and TACT Meeting.
Thursday 11 February 2010
Present: IHT: Tony Key, Ken Waite, Sarah Kelsey, Simon Thompson and Colin Varney.
TACT: Paul Saunders (Barclays Wealth), Michael Coulshed (HSBC Trust Co) and Nick Dimmock (Nat West).
Q1 s.178/179 IHTA 1984 –(i) There appears to be an element of misunderstanding, which appears to be encouraged by IHTM34211, that relief under s.178/179 IHTA is limited only to those situations identified in that paragraph, or that some other purpose test exists. The legislation does not provide for any such restriction. It would be useful to clarify this point and, perhaps update the IHT Manual to ensure a consistent understanding.
A1(i): The essential point is whether the sales were made by the appropriate person or not. Sales made during the normal administration of the estate will be made by the appropriate person; however, once the administrators reach the point where they are holding assets as bare trustees for the beneficiaries, any sales would be at the behest of the beneficiary and therefore not by the appropriate person. The words at IHTM34211 were intended to be examples of the former situation; but not limited to the circumstances described. The words are probably in the wrong place and the IHT Manual will be changed so the point is made on a more appropriate place in the Manual.
Q1(ii): Where unit linked investment bonds are held by the deceased, relief has been allowed where a loss has arisen on the realisation of those bonds. The use of unit linked bonds is reducing, in favour of bonds linked to track a particular index (e.g. the FT 100). As with unit linked bonds, the redemption value of these bonds can vary after death depending on “Market movements”. Going forward, can relief be allowed on losses on realisation of such bonds?
A1(ii): This is a complex area involving many variations on the type of asset held. The product would have to be identified before a decision could be made as to whether loss on sale of shares relief could be allowed. If the nature of the product was such that the deceased’s estate included qualifying securities which were sold, then relief would be available. Where, however, the value of the product is only determined by reference to value of particular units so that the deceased did not own the underlying units, it was difficult to see that the estate could be said to include any qualifying investments. Where the value of the product was determined by reference to movements in a particular index, the underlying asset is most likely to be cash and would not qualify for relief.
Q2: District Valuer - Practitioners are identifying that there appear to be significant delays with District Valuers. There are many instances where HMRC is being chased some time after the DV is said to have been instructed, as the taxpayer has had no contact with the DV. Is there any agreement between HMRC and the VOA as to the time scale for the production of a report? It would help tax payers if any agreed time scales could be published as this will enable them to manage the expectations of their beneficiaries, and help reduce the number of unnecessary referrals to HMRC
A2: IHT refer valuations to the VOA’s Initial Appraisal Unit (IAU) for initial appraisal of the valuation. IAU will clear 100% of these within an average of 5 days. If the value offered is not acceptable it will be referred to a local valuation office. The local VOA has a period of 20 days to do a more in depth initial appraisal and if it is still unable to accept the value offered to make the first approach to the parties (usually with a questionnaire to be completed).
HMRC has recently introduced a new IT system that will help IHT caseworkers and VOA monitor the progress of the valuation more closely. By way of reminder, if a property or land can not be easily identified it assists if a plan or map is provided. This will dispense with the need for HMRC or VOA asking for this and therefore delaying the valuation.
For 2010/11, it is intended that the VOA will report all cases (with the exception of agricultural relief cases) where the value offered is not acceptable within an average of 80 working days. All agricultural relief cases will be reported within an average of 145 working days. The targets for 2010/11 are currently being finalised and HMRC/VOA will look at ways to make them more widely available.
3: Clearance Letters – various concerns are raised over inconsistencies arising from the use of clearance letter, generated by HMRC :
Q(a): Clearance letters have been issued merely due to an apparent lack of activity on a file, despite the fact the activity was a delay in production of the DV’s report.
A(a): It would appear the clearance letters were issued in error on these cases. Clearance letters should not be issued until all matters including property valuations are finalised. HMRC will monitor this.
Q(b): Clearance letter have been issued notwithstanding that a formal clearance certificate under s.239 IHTA had already been issued
A(b): A clearance letter may have been issued in this case because amendments were received after the issuing of the clearance certificate.
Q(c): The Help Line has advised tax payers that clearance letters will not be issued in every case. On another occasion, the Help Line categorically stated that clearance letters will no longer be issued, and that taxpayers should no longer apply for clearance “under any circumstances” (although s.239 certificates have since been received by that taxpayer).
A(c): This is wrong advice for which HMRC apologises. It is usual practice for HMRC to issue clearance letters. For a brief period because of operational reasons these letters were not issued. In the event of any problems regarding helpline advice on clearance letters, callers should contact Frazer Zemontas on 0115 9742414 or Denise Bryan on 0115 974 2412.
Q4: Deemed Domicile - HMRC has previously advised that the deemed domicile rules in s.267 IHTA 1984 do not apply where the domicile of the deceased at death is France, India, Italy, or Pakistan. Would HMRC please confirm that this remain the case. If there have been any changes that will affect this, it would be helpful for HMRC to provide details, including a note of the (intended) effective date.
A4: This remains the case. The new DTA signed with France does not affect the IHT position. By way of reminder, the deemed domicile rules are only disapplied if the deceased is not domiciled in the UK under common law and domiciled in one of the four Treaty partners under the rules of that country..
Q5: Gift & Loan Trusts – There is uncertainty as to the value of an outstanding loan for IHT purposes, especially in cases where the trust fund, once liquidated, is insufficient to satisfy the outstanding debt in full. We take it that the initial value disclosed should be based upon the value of the trust fund as at the date of death, adjusted for any trustee fees that might be due on the winding up of the trust. If a different amount is subsequently received, as might be the case if the trust fund is invested, should the value of the loan be amended to reflect this?
A5: The loan should be valued on the normal open market basis under the provisions of s160 & s166 IHTA. This valuation should reflect the terms and conditions of the product in question and all the circumstances known at the date of death (including the value of the trust fund if that is a relevant factor). If a larger or smaller sum is received when the loan is repaid, this would not affect the value at the date of death, provided all known facts were taken into account in arriving at the open market value.
Q6: Discounted Gift Trusts - there is a discount allowed for IHT purposes, which reduces by reference to the settlor‘s age at the time the trust is set up. If the value settled for IHT purposes is within the settlor’s available nil rate allowance at the time of the gift, then taper relief has no effect. However, in the intervening period, the settlor will receive significant capital sums (up to 5% annually of the initial value settled) which can result in a substantial IHT charge. This is particularly noticeable where the settlor dies shortly after the settlement has been made (e.g. within a year) and there is no age-related discount. Would it not be reasonable for the value of the gift to be reduced by reference to these capital withdrawals?
A6: These products are very carefully designed to take advantage of certain parts of the IHT legislation and in particular to avoid the reservation of benefit rules. But that does mean that they are outside the Double Charges regulations. If circumstances conspire such that a greater sum falls into charge than would have been the case had the scheme not been taken out, that is one of the risks that the taxpayer takes.
Q7: s.191 IHTA 1984 – relief is available even where the sale is to a beneficiary. However, there appears no clear definition of what constitutes a “sale” to a beneficiary. Guidance on this would be helpful.
A7: Provided there has been an exchange of money and a formal contract exists, there has been a sale. In normal circumstances, HMRC would expect the sale to give rise to Stamp Duty Land Tax. “Sale price” is defined in s190(1) as the best “consideration”, so if the circumstances so dictate, it can include an exchange for valuable consideration in money’s worth.
Where a sale is to a beneficiary HMRC accept relief applies (subject to the usual conditions) provided the sale is for best consideration and the interest sold is different from the beneficiary’s original interest i.e. the beneficiary is left a third share in a house under the Will but purchases the whole house.
Q8: Valuation of Joint Realty – (i) for IHT purposes, a discount of 10% is generally allowed on real property, jointly owned 50/50. However, for CGT purposes, the DV will generally give a discount of 15%. Whilst it is accepted that the tax regimes have differing rules, the valuation principles for IHT and CGT are the same. It is not clear, therefore, why the discount varies between the taxes. We suggest that the discount rates should be the same, preferably 15%. What discount would HMRC look to be applied for other ownership divisions, e.g. if there are 3, 4, or 5 equal owners, or if held in the ration 1:2 or 1:4?
A8(i): The amount of the discount is a matter for the DV. HMRC understands that a 15% discount will apply where a main residence is jointly owned (although for CGT purposes PPR is likely to be in point) and a 10% discount for other property. HMRC will remind staff that any discount for jointly owned property is a matter for the DV to decide. It is not possible to fix discount levels as it depends on the facts of each case.
Q8(ii): There continues to be a disconnect between the provisions of s.161 IHTA and the CGT position where no IHT is payable. Whilst the deceased’s interest is disclosed as a mathematical half share of the entire property value, when sold, CGT is assessed on the basis of the acquisition value of the deceased’s share being discounted (generally by 15%). This may give rise to a substantial CGT liability in the estate. We suggest the tax system might be aligned to prevent such a tax liability arising
A8(ii): IHT and CGT are different taxes. HMRC will refer the point to those responsible for IHT policy.
Q9: Joint Property Passing on Death - there is anecdotal evidence that assets that have been transferred into joint names are being acquired in full by the surviving co-owner(s) following the death of one party without such assets being disclosed for IHT. We understand that assets will often be placed in joint ownership for completely legitimate purposes, and it is only around the time of the death that “other advantages” of joint property are identified by the surviving co-owner(s). Whilst asset holders are aware of their duties under the Proceeds of Crime Act 2002, unless there are reasonable grounds for suspicion (which cannot merely be fanciful), the asset holders do not provide any details of joint property passing on the death of any of the co-owners. There is no requirement for the asset holder to require evidence that the assets has been disclosed to HMRC and any IHT paid. Whilst we do not suggest that asset holders should be required to police the disclosure of joint assets to HMRC, HMRC might consider if there are any actions that it should consider so as to protect the revenue stream that might be lost through the abuse of joint ownership?
A9: HMRC are able to verify the information provided in IHT accounts and returns against various information sources within HMRC. This can and does identify cases of the type referred to.
Q10: Outstanding from 2007 Meeting –
Are you able to provide an update on the following issues, please
37 Where the former matrimonial home was held by the deceased and spouse/civil partner as tenants in common, and the deceased’s half share is placed in a nil rate band discretionary trust, would HMRC please confirm that if the survivor remains in sole occupation of the property they will not be deemed to have an IPDI unless the LPR/trustee actively grants them exclusive rights of occupation, as opposed to allowing the pre-existing occupancy to continue.
Answer from previous meeting:
HMRC acknowledges that this is a difficult area and believes that a case may be heard by the Special Commissioners shortly
A10: Position has not changed. Case did not progress to Tribunal stage so this topic has not been tested.
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