Excepted transfers & terminations

  1. The current regulations excuse taxpayers from delivering the account required under s.216 IHTA 1984 where:
  • the value transferred by chargeable transfer(s) in any one tax year does not exceed £10,000, and the aggregate of value transferred by all chargeable transfers in the past 10 years does not exceed £40,000, or
  • the value transferred in connection with a termination of an interest in possession (IIP) does not exceed the amount of exemption specified in the notice given to trustees by the transferor under s.57(3) IHTA.
  1. We propose to extend these regulations by:
  • introducing a new test that focuses on the value of the asset in the hands of the transferor before the transfer,
  • raising the cash limits and linking them to movements in the IHT nil-rate band,
  • aligning the treatment of excepted transfers and excepted terminations.
  1. The current regulations focus on the value transferred by a chargeable transfer. We propose that the new regulations will contain three tests:
  • firstly, that the value of the asset in the hands of the transferor before the transfer should not exceed a specified limit; unless the loss to the estate arising from the transfer exceeds that value, when it will be that greater value that applies. In both circumstances, it is the value before the deduction of any liabilities, exemptions or reliefs that may apply to the transfer that is to be used,
  • secondly, that the value transferred by the chargeable transfer should not exceed a specified cash limit, and
  • thirdly, that the cumulative total of all chargeable transfers made by the transferor in the 7 years preceding the current transfer, but including that transfer, should not exceed a specified cash limit.
  1. We propose to link all these amounts to movements in the IHT threshold by stipulating that the cash limits should be maintained at a specified percentage below the IHT threshold applying at the date of charge. We propose that the regulations should include a formula to achieve this which we suggest might read “x% below the IHT threshold, but rounded up to the next £5,000”.
  2. For the first and second tests in 3. above, we propose that the cash limit should be 30% below the IHT threshold, and for the third test 15% below the IHT threshold. In terms of the threshold for 2007/08 this would give limits of:
 

IHT threshold

Reduction

Actual

Rounded up

300,000

30%

210,000

210,000

 

15%

255,000

255,000
  1. The examples below show what we are intending the new regulations would achieve:
  • Example 1
    Transferor disposes of ½ share of their house. The full value of the house is £400,000 and the arithmetic value of the share is £200,000; after a discount of 10% the value of a half share becomes £180,000. The loss to the estate is therefore £400,000 - £180,000 = £220,000.

    The value of the asset disposed of (half share of the house) before the transfer is £180,000 and therefore below the cash limit – but the loss to the estate is £220,000 so the transfer is not an excepted transfer.

    • Example 2
    Transferor invests £300,000 in a discounted gift scheme. Given his age and the repayment period, the retained rights are valued at £120,000. The “before” value is £300,000; the loss to the estate is £180,000. The transfer is not an excepted transfer as the “before” value exceeds the cash limit.
  1. We propose to retain the existing restriction that the regulations do not apply to any disposition that is deemed to be a transfer of value.
  2. We propose to retain the existing regulations so that a transfer which arises on the termination of a life interest and which is exempt is excused the need to deliver a return. The regulations will continue to contain a formal discharge.
  3. We also propose to extend the regulations so excepted terminations which are not wholly exempt are treated in the same way as outlined above for excepted transfers.
  4. We do not propose any other changes to the regulations, so the provisions of existing regulations 3 – 7 remain; particularly, there is no statutory discharge for excepted transfers or excepted terminations (that are not wholly exempt) because of the possibility of a charge to tax arising on the death of the transferor within 7 years of making the transfer.