IHTM14821 - Associated operations: why are the provisions necessary?

When looking at chargeable transfers for inheritance tax, you will consider the impact of the loss to the estate on each disposition. This offers scope for the estate to avoid tax through artificial fragmentation of an intended transfer into several dispositions.

Example

T has a 100% shareholding in ABC Ltd. At 11 June 2001 it is valued at £100,000.

T transfers

• a 33% holding to S on 11 June 01
• a 33% holding to S on 12 June 01 and
• a 34% holding to R on 13 June 01

Following T’s death in August 2001, the loss to the estate on each transfer is individually valued at

• 43,000
• 26,000, and
• 17,000 respectively.

A total of £86,000

The total of the individual transfers for inheritance tax is only 86,000 but T had effectively given away £100,000 worth of assets.

The legislation at IHTA84/S268 counters this in certain circumstances so that you can look at the overall effect of several events through the concept of “associated operations”.

The effect of associated operations is extended or limited in various areas of IHT legislation.

Before you seek to apply the associated operations provisions, refer to Technical Group for approval or guidance.