HMRC IHT & Trusts Newsletter - August 2007

Contents

Introduction

Welcome to the first edition of our joint IHT & Trusts Newsletter. Now that we are managing our IHT & Trust offices as one entity we have decided to replace our previous IHT Newsletter with this joint publication and, at the same time, move to publication online. We hope you will like this new format and if there are any issues you would like us to address in a future edition, please let our customer service team know.

Dave Shaw
Head of IHT & Trusts

Payment of Inheritance Tax - payslips

We told you in our August 2006 IHT Newsletter about the move of all cheque handling to the Accounts Office at Shipley. In advance of this, we introduced bank approved payslips for all calculations that we issue and for the initial payment of tax in Scotland. We will be extending the use of payslips to the initial payment of tax in England & Wales and in Northern Ireland before the end of this year. We will be publishing details of the new process on the HMRC website and in leaflets sent with D18s – please keep an eye out for this information.

Payment of Inheritance Tax in Belfast & Edinburgh

Our Cashiers teams in our Belfast and Edinburgh offices have been closed now for at least 9 months, but we are still receiving a number of payments at these offices. We do not have banking facilities at these offices and sending your payment to either Belfast or Edinburgh will certainly delay the return of form D18/C1 to obtain probate or Confirmation and – as we do not have a secure means of sending the payment to Nottingham – runs the risk that the payment may be lost.

Please do not send payments to our Belfast and Edinburgh offices.

Trust & Estate Returns - box 9A.1

We are writing to professional advisors who complete Trust and Estate Returns to alert them to a problem with the completion of box 9A.1. The main body of the letter and accompanying notes is reproduced here for your information.

Excepted transfers and excepted settlements

We are planning to make some changes to the existing regulations that govern excepted transfers and excepted settlements. We have published our proposals on the Internet and welcome your comments. We plan to make these regulations effective from 6 April 2007.

Valuing assets for excepted estates

In establishing whether an estate qualifies as an excepted estate, you should value assets on the open market basis required for IHT. Other than in the exceptional case, we will not have cause to consider the values you put forward. Where, in particular, land and buildings are sold for a different value from that returned on form IHT205 (or C1/C5 in Scotland), you only need to notify us of the change if it gives rise to an IHT liability.

Where this is the case, the estate will no longer qualify as an excepted estate and you should deliver form C4 (and a copy IHT205 or C1/C5) with details of the change within 6 months of becoming aware that the estate no longer qualifies.

Where the change does not give rise to a liability, there is no need to notify us of the change. We will not enter into any discussions with you about the value of the property and the value of the property at the date of death will not be ascertained for CGT purposes. Whether a chargeable gain has arisen will depend on the circumstances of each case; and where appropriate, any gain should be calculated and tax paid accordingly.

Double death Instruments of Variation (IoV) and excepted estates

Where two people (usually spouses or civil partners) die within two years each of other and on the death of the first, their estate was left to the survivor, it is possible for the beneficiaries of the second to die to vary the estate of the first to die so that for IHT purposes, the assets no longer form part of the survivor’s estate. But there are a couple of important points to bear mind in these circumstances.

  • This process can only apply where assets from the estate of the first to die pass absolutely to the survivor. If the survivor is left a life interest in the first estate (assuming, if the survivor becomes entitled to it on or after 22 March 2006, that the interest qualifies as an immediate post-death interest within section 49A IHTA 1984), this cannot be varied after the survivor’s death.
  • The hypothesis created by s.142 applies only for IHT (& CGT where those making the variation invoke section 62(6) TCGA 1992) purposes – it does not and cannot alter the fact that at death, the estate of the survivor includes the assets inherited on the first death. The estate for which Probate/Confirmation is required is the “combined” estate and the assets from both estates must be taken into account to establish the gross value of the estate on the second death. Where this gross value exceeds the IHT nil-rate band the second death cannot qualify as an excepted estate. The correct process is to complete form IHT200 for the “combined” estate, so the correct values are carried forward for Probate/Confirmation and then deduct the assets that are being redirected away from the second estate as a relief. This way, the correct position is reported for Probate/Confirmation and the impact of the IoV is correctly applied for tax purposes only.

IHT Agricultural Property Relief: availability where crops are grown for fuel

Recently we have become aware that some people are unsure whether IHT Agricultural Property Relief (APR) is available where farmers grow crops for fuel. We take the view that land cultivated for the growing of energy crops is agricultural land and such use counts as occupation for agricultural purposes. We can confirm our published guidance on APR in Section 24 of the IHT Manual, which indicates that cultivation of the land to produce the crop is a key requirement in enabling land to qualify for APR. For example, paragraph 24103 of the Manual cites a rating case concerning reed beds that grew naturally and were then cut for thatching. There was no tilling, sowing or cultivating of the land and all the ratepayers did was to cut the reeds. The absence of tillage meant that the reed beds could not be classed as agricultural land.

A leading IHT practitioners’ text book, Dymond’s Capital Taxes at paragraph 24.863, supports the view that land under cultivation may generally be regarded as being used for the purposes of agriculture.

National Coal Board Compensation scheme

It is a while since this scheme was introduced and we have noticed a few accounts coming through for estates where the only reason for the grant is to process a claim for compensation under the NCB scheme. Our August 2000 IHT Newsletter and May 2003 IHT Newsletter (special edition) explain the simplified process to deal with such cases.

Forms to use for deaths prior to 18 March 1986

Although unusual, we are still asked to provide forms for deaths prior to 18 March 1986. It is becoming increasingly costly to maintain stocks of the various forms that applied more than 20 years ago, so we have decided to limit the forms that we will retain stocks for as follows

England & Wales and Northern Ireland

Estate Duty - deaths before 13 March 1975

UK domicile A12
Non-UK domicile A13

Capital Transfer Tax – deaths on or after 13 March 1975 and before 18 March 1986

UK domicile CAP200
Non-UK domicile CAP201

Inheritance Tax – deaths on or after 18 March 1986

IHT200

Scotland

Use the current Inventory form C1 and the appropriate tax account as above.

You can order the forms from our Probate and IHT Helpline. Please note forms IHT200 and C1 can be downloaded from the HMRC Inheritance Tax area of this website.

Help with domicile

Domicile is an important factor for Inheritance Tax; on death, the deceased’s domicile determines the succession to personal property, so it may affect the amount of spouse or civil partner exemption available. For both the transfer on death and for lifetime transfers, the deceased/transferor’s domicile determines the territorial scope of IHT. And for transfers between spouses or civil partners, the amount of exemption is limited to £55,000 if the deceased/transferor is domiciled in the UK but the spouse or civil partner is not.

We sometimes receive calls to our Helpline asking for assistance to establish the deceased/transferor’s domicile. Our agents can help with filling in form D2/D31 and can talk in general terms about the impact of domicile for IHT. But they are not able to provide a definitive answer about a taxpayer’s domicile over the ‘phone. That decision can only be made once an account for the chargeable event concerned has been delivered. When delivering the account, please make sure that you complete form D2/D31 as fully as practicable, as this allows us to resolve the question of domicile as efficiently as possible.

Naturally, we are unable to comment about a person’s domicile unless an event which gives rise to an IHT charge occurs.

Investigation of IHT200: Looking at lifetime transfers

From now until 31 March 2008, when looking at forms IHT200 received on a death, we will be paying particularly close attention to lifetime transfers. Not only will we be looking at estates where a form D3 has been completed giving details of gifts or other transfers of value, but we will be reviewing other aspects of estates which we know can give rise to lifetime transfers. These may include:

  • joint assets – gifts can arise on a transfer into joint names or where a joint owner receives the benefit of withdrawals from accounts funded wholly by the deceased
  • loans – gifts can arise on the forgiveness of a debt or part of a debt
  • movement of funds between multiple bank accounts – this can lead to gifts being overlooked
  • inheritance – gifts can arise if there have been redistributions of property inherited by the deceased
  • business or partnership – transfers from a business or partnership interest will not necessarily qualify for business relief
  • rights under a pension scheme – a gift may arise if acts or omissions by a member of a pension scheme have the effect of increasing the value of benefits passing outside the member’s estate at the expense of his own estate.

Where the information provided about these aspects is unclear, or incomplete, there is an increased likelihood that we will ask for further information or seek an explanation of what has occurred.

In appropriate cases we will open an enquiry and ask you for further information to satisfy ourselves that all gifts have been included. We will tell you if the estate is one that has been selected for enquiry in this way. Where it appears that the accountable persons have been negligent in not disclosing a gift in the IHT200 we will consider whether a penalty is appropriate.

Excepted estates

The excepted estate limit is now £300,000 for deaths on or after 6 April 2007, where an application for a grant is made on or after 6 August 2007.