IHTM22093 - Settled property: Calculating QSR

Where conditions for a QSR ( IHTM22041) on lifetime termination of an interest in possession ( IHTM16061) are satisfied, the manner and extent of the reduction are similar to those on death.

However there is an important difference between the settled property QSR on lifetime termination of an interest in possession in settled property and the QSR on death. On death, if the QSR calculation produces a figure greater than the death tax, the excess tax is lost. With the settled property QSR there may be a further QSR on a later transfer.

Example

A settled fund is held on trust for A for life, with remainder to B for life, with remainder to C absolutely. A dies in May 1998.

The settled fund is valued at £1,000,000 and the free estate is £250,000. The total tax payable is £410,800, of which £82,160 is attributable to the free estate and £328,640 to the settlement. The increase to B’s estate is £671,360, and the tax attributable to that increase is:

In January 2000 B and the trustees advance £270,000 out of the capital to C absolutely.

In February 2001 B and the trustees advance a further £190,000 out of the capital to C.

In February 2002 B dies. IHT is payable on both the PETs ( IHTM14024) and on the remainder of the settled fund which devolves on C absolutely on B's death.

There is a QSR by reference to the tax paid on A's death against the tax on both the PETs and the charge on C's death.

The rules you must apply in this kind of situation are

1. Allow the relief against the earlier of the later transfers.
2. If the QSR calculation results in a figure greater (before reduction by the appropriate percentage ( IHTM22052)) than the tax on that transfer, allow the excess against the tax on any subsequent later transfers in the chronological order in which they are made.
3. Continue this process until the allowable tax is exhausted or the transferor dies.
4. For these purposes calculate the excess as if the relief allowed had been at 100%, not as reduced by the appropriate percentage.

Applying these rules to the facts in the example (and assuming no other lifetime transfers and ignoring the annual exemption):

Rule 1

The relief is allowed firstly against the earliest transfer, the January 2000 PET. Tax on the PET is £11,200. QSR is available at 80% and completely covers that tax liability.

Rules 2 and 4

The excess is allowable against the tax on the later transfers. The excess is not the excess over £11,200. It is the excess over the amount of which £11,200 is 80% - i.e. £14,000. So the available excess is:

Rule 2

The next transfer is the PET in February 2001. Tax on the PET of £190,000 is £76,000. QSR is available at 60% and completely covers the tax liability.

Rule 3

The excess allowable against later transfers is the excess over the amount of which £76,000 is 60%.

There is only one later transfer, on the death of B in February 2002, so it must be the last on which the QSR is available. The available QSR is 40% of £93,968, which is £37,587.