26 September 2016 Martyn Ingles FCA CTA CGT Update - Agenda PPR - - PDF document

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Capital Taxes Update and Planning 2016 26 September 2016

Martyn Ingles FCA CTA

• PPR refresher
• Relief for gifts – business assets and using trusts
• Goodwill on incorporation – worth doing again?
• Transfer of rental business to Ltd company
• Entrepreneurs’ relief – watch 5% rule
• Making Seed EIS work for your clients
• IHT planning including the new “downsizing” relief

CGT Update - Agenda

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• Taxpayer’s main residence exempt
• Includes grounds of 0.5ha
• Or “required for reasonable enjoyment having regard to

size and character”

• Includes servants quarters
• And buildings in “curtilage”

Private Residences

• If 2 or more residences
• May elect which is principal residence
• Only one at time
• Switch back and forth
• Last 18 months owned then exempt (was 36m)
• Acceptable tax avoidance per GAAR guidance

Private Residence Planning

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• Moore v HMRC – FTT decision
• Property initially a “Buy to Let”
• Marriage break up – “moved in” to property 12.11.06
• Council tax records support this
• Property sold 22.7.2007 = 8 months later
• Put property on market with Estate Agent – 22.4.2007
• Date moved in with new girlfriend? – unclear
• Post delivered to girlfriend’s address (2nd wife)

Not a Residence for CGT PPR

• HMRC’s view - Mr Moore’s occupation did not have

the degree of permanence, continuity or expectation

• f continuity necessary for the property to qualify as

his only or main residence for the purposes of sections 222 and 223 TCGA.

• Goodwin v Curtis – “A person’s ‘home’ was to be

distinguished from a property which the person temporarily occupied”

• FTT rejected taxpayers appeal – NOT PPR

Not a Residence for CGT PPR

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• Trustees get PPR if beneficiary lives in house
• Martyn’s daughter Hannah – buy flat in Manchester? 3
• ptions:
• 1. Martyn buys – not PPR
• 2. Hannah buys, Martyn as guarantor (her PPR)
• 3. Buy via trust – PPR available to trustees
• (With 3, Martyn should not lend funds to trust – could

invoke the settlements rule – he should g’tee the Trust borrowing or settle funds absolutely)

Child at University? Extra PPR

CGT payable by non- residents from 2015/16

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• Consultation in Summer 2014
• New charge from 6 April 2015 on disposal of UK

residential properties (dwellings)

• Applies to NR individuals, trustees and close companies
• Rebase at 6 April 2015
• Numerous exclusions e.g. property development and

properties for communal use

• Can they claim PPR relief?

CGT payable by non-residents

• Frau Merkel lives in Germany bought a holiday cottage

in England April 2005 for £500,000, uses 2 weeks/ year.

• Sells the cottage in April 2020 for £650,000. Market

value of the cottage on 6 April 2015 was £550,000.

• Gain computed with ref to 6 April 2015 value £100,000.
• Time apportioned gain on cost £150,000 x 5/15 =

£50,000

• Elect to use the time apportionment basis

CGT payable by non-residents

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• PPR will still be available to non-residents disposing of

main residence in Uk

• Consultation considered 2 options:
• 1. Remove election - HMRC may seek evidence that de-

facto main residence – mail delivery, electoral roll.

• 2. A fixed rule to identify the main residence based on

number of days spent there New legislation requires occupation for at least 90 days in the tax year concerned to qualify for PPR

Private Residence Relief for Non-Residents

Relief for gifts Business assets and trust planning

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• Two alternatives
• S165 – gift of business assets
• Are the shares a business asset?
• S260 – transfers subject to immediate IHT charge
• Lifetime transfers to most trusts now
• Can be any asset

Hold over (gift) relief

• Shares in trading company
• Up to 5.4.03 linked to retirement relief definition
• Trading company = “wholly or mainly” test
• CBA/CA restriction if personal company
• Now linked to “trading company” 20% test

S165 business gift relief

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• Where shareholder has >25%
• or personal company
• Restrict gain available for holdover
• To MV chargeable business assets portion
• Goodwill? Old or new?

CBA/ CA restriction

• Business premises

300,000 CBA

• Fixed plant

50,000 CBA

• Goodwill

1,250,000 CBA?

• Investments

150,000 CA

• Other net assets

250,000

• Total value

2,000,000

• < 20% thus trading company

CBA/ CA restriction – Example

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• Business premises

300,000 CBA

• Fixed plant

50,000 CBA

• Goodwill

1,250,000 CBA

• 1,600,000
• Investments

150,000 CA

• Total chargeable assets

1,750,000

• S165 holdover restricted to 91.4%
• If £40,000 then £3,439 chargeable (< annual exemption)

Old Goodwill – Bloggs Trading Ltd

• Business premises

300,000 CBA

• Fixed plant

50,000 CBA

• 350,000
• Investments

150,000 CA

• Total chargeable assets

500,000

• S165 holdover restricted to just 70%
• If £40,000 gain = £12,000 chargeable

New Goodwill – Bloggs Trading Ltd

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• Gift of any asset where there is immediate IHT charge
• Lifetime transfer to all trusts now
• If < £325,000 then no IHT (< nil band)
• Also transfers out of trust
• Planning?

S260 TCGA gift relief

• S260 TCGA – hold over gain where there is IHT charge

e.g. transfer into and out of trust

• Simple planning technique
• Dad wants to give daughter £300K investment property.

Base cost £60K

• CG = major deterrent
• Gain = £240,000 – 28% CGT = £67,200

Passing on a Buy to Let using a trust

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• Simple planning technique
• Dad transfers property into trust = if immediately

chargeable = CG holdover (s260 TCGA)

• IHT charge? – likely to be within nil rate band (£325K)
• Property into trust for daughter without tax charge
• No CGT, no IHT

Passing on a Buy to Let property

• Simple planning technique
• Property in trust
• If trust is felt to be inappropriate…
• Wait at least 3 months…
• …. Or if trust suits, for longer
• Appoint out property to daughter
• Holdover under s260 TCGA on way out – No CGT
• If gifted directly no holdover = CGT for Dad

Passing on a Buy to Let Property

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Rollover relief

Replacement of business assets

• Replacement of business assets
• Reinvest proceeds from old asset within period 1 yr

before to 3 yrs after disposal

• Gain either held over or deferred
• Depends upon type of asset

Rollover relief

13 1.4.15 1.4.16 1.4.19 BUY NEW ASSET SELL OLD ASSET

Rollover relief

36M 12M

• Land and buildings
• *Goodwill
• Fixed plant & machinery
• Ships, aircraft, hovercraft
• Satellites and space craft!!
• *Quotas
• *Entitlement to SFP and its 2015 replacement

Rollover relief - qualifying assets

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• Expected life < 60 years
• E.G. Leasehold premises
• Gain on old asset merely deferred
• Deferred until earlier of
• Sale of asset
• Cease using asset in trade
• 10 years after acquisition

Depreciating assets

CGT on incorporation

15 MR A MR A TRADE AND ASSETS SOLD TO A LTD DR ASSETS CR LOAN A/C USE MV TO COMPUTE GAINS

CGT on incorporation

A LTD Mr Jones Mr Jones TRADE AND GOODWILL SOLD TO JONES LTD DR G/WILL £1million CR LOAN A/C £1 million

Goodwill on Incorporation

Jones Ltd

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• Incorporate business 30 November 2014
• “Sell” goodwill to Jones Ltd leaving balance outstanding
• n loan account
• Gain on goodwill £1,000,000
• With entrepreneurs’ relief just 10% CGT = £100,000
• Can then withdraw loan account “tax free”
• If post 1.4. 2002 goodwill could even claim a CT

deduction… say 10 years = £100,000

Goodwill – What we used top be able to do…

Mr Jones Mr Jones TRADE AND GOODWILL SOLD TO JONES LTD DR G/WILL £1,000,000 CR LOAN A/C £1,000,000

****CGT Entrepreneurs’ Relief no longer available from 3 December 2014 ****

Goodwill – Autumn Statement

Jones Ltd

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• Sole trader/ Partnership to Ltd company
• Related parties
• Thus no write off of OLD goodwill (pre 1.4.2002)

*** Can no longer write off if transferred from 3 December 2014 onwards ***

Goodwill – CT deduction also blocked

• Before
• Mr Jones £1,000,000 gain = £100,000 CGT
• Jones Ltd : £100,000 a year profit - £100,000

amortisation = NIL taxable profits, CT NIL

• Now:
• Mr Jones £1,000,000 gain = £280,000 CGT
• Jones Ltd: Accounting profit NIL= no dividends
• Taxable profits £100,000 p.a. = £20,000 CT p.a. x 10.
• 10 years = £480,000 tax (£280,000 + £200,000)

Goodwill – Additional tax

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• Small goodwill gains – covered by £11,000 annual

exemption but 18%/28% thereafter

• S165 – gift of business assets
• Hold gain over into cost of assets
• Assets have low base cost
• Use if property to be retained personally
• S162 – transfer of a business in exchange for shares
• Hold gains into base cost of shares
• Assets at market value
• No gain if asset sold shortly after

Incorporation – CGT reliefs still available

• Use brought forward capital losses
• If recently acquired on death – uplift to probate value
• Allocate more of the value of the business to other

assets e.g. properties rather than goodwill – watch SDLT

• Note that ER still available against gains on other

chargeable assets transferred

Incorporation – other strategies

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• Worth considering selling goodwill again now CGT rate
• nly 20%?
• Share of goodwill valued at £1,000,000
• Transfer to Ltd company 30 June 2016
• CGT due 31 January 2018 = £200,000
• £1,000,000 credit to loan account
• Net cost £800,000
• No CT deduction for goodwill amortisation
• Say 10 years = £100,000 p.a. disallowed
• Sufficient profits to pay dividends?

Goodwill on incorporation - back on?

• Ramsey v HMRC UKUTT
• S162 TCGA holdover applies on transfer of a business
• Does not have to be a trade
• Gains held over into base cost of new shares issued
• Property rental business transferred – 10 flats
• FTT agreed with HMRC that not operated as a

business!

• 20 hours a week arranging maintenance, collecting rent,

cleaning between lets

• Wrong decision? – Overturned at UTT

s162 incorporation relief – is it a business?

20 10% CGT on first £10,000,000 gains now

Entrepreneurs Relief

• Disposal of all or part of a business
• Disposal of shares in or securities of a company, or
• Disposal of assets following cessation of a business (3

years) (NB – C16 striking off now gone – must liquidate now)

Disposal of business assets

21 Trading Liquidation Entrepreneur relief on capital distribution if within 3 years

Entrepreneurs Relief

1 YEAR 4 YEARS

• Shareholder conditions:
• Officer or employee
• 5% of shares and voting rights
• Company conditions:
• Trading company

Entrepreneurs’ relief – Shares and Securities

Min 1 year

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Associated disposal?

BLOGGS LTD MR BLOGGS

• Asset used by partnership or personal company
• Relief available where disposal results from disposal of

all or part of the business or shares AND

• Withdrawal from the business
• Just and reasonable apportionment of gain eligible if

charge rent

Entrepreneur’s Relief

• associated disposal

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• HMRC guidance CG63995
• Associated disposal and material disposal of business

assets linked

• Relief not due unless the disposal is related to the

individual’s reduction of

• his interest in the assets of the partnership
• or holding in the company
• From 18.3.2015 – must dispose of at least 5% of

shares or partnership interest

“Withdrawal from Business”

Managers (3% each) A B C D Private Equity Co ER on shares? 12% 88%

Contrived Structures - ER on shares now?

Manco Ltd Trading partnership

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P-E Company

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• Is Corporate Member a Trading company?
• FA2015 inserted s169(4A) TCGA 1992
• Activities of a company that is member of partnership

treated as non-trading activities

• Thus unless cormpany also has significant trading

activities in addition to partnership share no ER now!

Corporate members and ER

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• Mr C held 5% of company’s ordinary shares
• The company had also issued a number of deferred

shares – no rights to dividends, no votes, limited rights to capital on a winding up = worthless

• Should these shares be considered as ordinary share

capital? If so Mr C only had 4.9%

• Held: deferred shares are ordinary shares
• Issued for a genuine commercial purpose
• As < 5% held by Mr C no entrepreneurs’ relief

Entrepreneurs’ Relief – Castledine case

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• Mr and Mrs McQ each held 33% of company’s ordinary

shares (total 100)

• The company had also issued 30,000 redeemable non-

voting shares – representing a loan to company

• No voting rights, no dividend rights, redeemable at par
• Should these shares be considered as ordinary share

capital? If so Mr and Mrs McQ held <1%

• Held: the redeemable shares not ordinary shares
• Thus CGT entrepreneurs’ relief

Entrepreneurs’ Relief – McQuillan case

• J K Moore v HMRC (2016) UKFTT
• Purchase by company of own shares
• Mr Moore owned 3,000 out of 10,000 shares
• Fell out with other directors – benefit company trade to

buy back 2,700 his shares (90% reduction)

• 300/7,300 after buy back (4.1%) = CGT
• But – entrepreneurs relief? - NO
• Resigned as director 28 February 2009
• Special resolution for buy back 29 May 2009

Entrepreneurs’ Relief – Not officer/employee

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Company distributions

CGT or IT?

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• New dividend rules – director/ shareholders may seek to

access accumulated profits in capital form:

• Sale to “friendly” third party
• Liquidation
• Repayment of share capital
• Purchase of own shares? – in the consultation
• Clauses 33-35 in latest Finance Bill
• If enacted will apply from 6 April 2016
• Extends Transaction in Securities rules and introduces

Targeted Anti-Avoidance Rule

Company distributions anti-avoidance

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• A close company is wound up and an individual (S)
• with a material interest (5%) receives proceeds from the

shares

• Within two years of that distribution S (or a connected

person) continues to be, or becomes, involved in a similar trade or activity; and

• One of the main purposes of the winding up is to obtain a

tax advantage

• Note – successor could be unincorporated business

Liquidations taxed as income if:

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• Company Liquidation or Reduction in Share Capital currently

taxed as Gain = 10% with entrepreneurs relief

• Where income accumulated in company may be taxed as

income in future? – Finance Bill 2016

• Profits

1,000,000

• Less corporation tax 20%

(200,000)

• Retained profit

£800,000

• CGT @ 10%

(80,000)

• Net cash to shareholder

£720,000 28% tax

• Dividends taxed at 7.5%,32.5%, 38.1% now

Company distributions

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• If distributed as a dividend:
• Profits

1,000,000

• Less corporation tax 20%

(200,000)

• Retained profit

£800,000

• IT @ 38.1% (AR)

(304,800)

• Net cash to shareholder

£495,200 50.48% tax

Company liquidations – if income

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S698 ITA - transaction in securities (was s703 ICTA)

• HMRC have power
• To cancel a “tax advantage”
• Taxes transaction as income distribution
• 32.5% (or 38.1% if > £150,000)
• Not CGT at 10% / 20%
• Apply for clearance s701 (was s707)

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IRC v Cleary

Clearys Clearys CASH AND PROFITS

Developments Ltd MJG Ltd

IRC v Cleary

Clearys Clearys

Developments Ltd MJG Ltd

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IRC v Cleary

• 2 sisters owned 2 companies
• “Developments” – significant accumulated profits, cash
• MJG Ltd – significant assets
• Sold MJG to Developments for cash at MV
• Caught by old s704D = IT distribution
• Not for bona fide commercial reasons

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Application to Buy Outs?

• Secondary Buy Out
• Original PE Fund investor wants to exit
• Seeks Replacement Investor, Management Team

retained

• Set up Newco
• Share and Cash deal – Managers could be subject to

IT on cash element – not if 75% shares change hands

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• Not HMRC general practice to offer clearances on recently

introduced legislation with a purpose test.

• They have however drafted a standard reply with a couple of

simple examples

• More detailed guidance being drafted – expected later this

year

Company distributions – non-statutory clearance?

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“The new legislation is designed to focus on the situation where shareholders are using winding up procedures as a means of distributing company profits, rather than paying dividends, so receiving the profits taxed as capital rather than income. The legislation applies only where all four conditions are met. HMRC expect the vast majority of distributions in a winding up will remain to be treated as capital receipts….. Conditions A and B are relatively straightforward; the company being wound up must be a close company and the individual must have held at least a 5% interest in the company….

Company distributions – HMRC standard letter

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32 ….Condition C is that the individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the

• distribution. Trade or activity is not defined, and is therefore

to be interpreted widely as anything done by the company. Condition C goes on to set out the way in which the individual would be viewed as continuing the trade or activity It will include as a sole trader, through a partnership, through another company, and through connection to the company of an associate…..

Company distributions – HMRC standard letter

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….Condition D is that “it is reasonable to assume, having regard to all of the circumstances” that there is a main purpose of obtaining a tax advantage. The circumstances in particular include that condition C is met. HMRC’s view is that Condition C is widely drawn but Condition D narrows the application to circumstances where, when considered as a whole, the arrangements appear to have a tax advantage as one of the main purposes…..” HMRC Letter includes simple examples

Company distributions – HMRC standard letter

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• Mr A has been the sole shareholder of a company which

carries on the trade of landscape gardening for ten years. Mr A decides to wind up the business and retire. Because he no longer needs a company he liquidates the company and receives a distribution in a winding up. To subsidise his pension, Mr A continues to do a small amount of gardening in his local village.

• When viewed as a whole, these arrangements do not

appear to have tax as a main purpose

• HMRC view is that CGT treatment would apply

Company distributions – HMRC example 1

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• Mrs B is an IT contractor. Whenever she receives a new

contract, she sets up a limited company to carry out that

• contract. When the work is completed and the client has

paid, Mrs B winds up the company.

• Here it looks like there is a main purpose of obtaining a tax
• advantage. All of the contracts could have been operated

through the same company, and apart from the tax savings it would seem that would have been the most sensible

• ption for Mrs B.
• HMRC view is that from 6 April 2016, in these circumstances

the distribution will be treated as a dividend and subject to income tax.

Company distributions – HMRC example 2

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EIS and Seed EIS and CGT planning

• 30% income tax credit*
• Max £1,000,000 @ 30%
• Disposal CGT exempt*
• Deferral of gains
• * Provided not connected
• Capital loss relief v income

Tax breaks for EIS investor

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• Carry on qualifying trade, or
• Parent co of trading group
• Unquoted (includes AIM)
• Gross assets £15m before issue (was £7m)
• £16m after issue (was £8m)
• SP2/00 - gross assets per B/Sheet

Qualifying Trading Company

• UK companies or those with UK PE (branch)
• Certain trades excluded (< 20%) :
• Dealing in land, shares, commodities, futures etc.
• Dealing in goods other than wholesale/ retail
• Banking, insurance, HP, financial
• Leasing, (royalties OK)
• Legal and accountancy

EIS / EMI - Qualifying Trades

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• Property development
• Farming, market gardening
• Woodlands and forestry
• Operating/managing hotels
• Operating/managing nursing homes
• Companies receiving Feed In Tariffs
• Providing services for non-qualifying trade

EIS / EMI – Excluded activities:

• Unconnected investor
• Not > 30% of share capital (with associates)
• Not an employee of company (nor associates)
• May be a director however
• New issue of shares for cash
• Retain shares for 3 years or relief clawed back
• Clawback if “value received” from company

Seed EIS – Qualifying Individual

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• Spouse, parent, child or
• Remoter forebear or issue
• Trustees of settlement where individual (or above)

settlor

• Not brother, sister, in-laws
• Business partner

Seed EIS – “Associates”

• Investors may become paid directors and qualify
• Unless previously connected
• Or involved in carrying on any part of trade carried on

by the company

• May make further investment within 3 years

“Business Angels”

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• Was to apply from 2012/13 for 5 years:
• 50% IT reducer up to £100,000 each tax year
• Plus CGT exemption on 50% of gains reinvested
• No CGT on disposal of shares (after 3 years)
• Total £150,000 investment per company
• Many rules based on EIS
• Unconnected investor
• New Qualifying trading company

Seed EIS relief made permanent

• Newly incorporated company: < 2 years prior to issue of

shares

• < £200,000 gross assets prior to share issue
• < 25 employees when shares issued
• In good financial health – not company “in difficulty”?
• Unquoted companies only
• Must not be in partnership
• Carrying out qualifying business activity (as EIS)
• Max £150,000 share issue qualifies for relief

Seed EIS – Qualifying Company

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• Catherine sells asset June 2015 £200,000 making

capital gain £80,000

• Invests £80,000 in qualifying Seed EIS company(s)
• No CGT on £40,000 capital gains – saves 14%
• Also gets £40,000 (50%) reduction in 2015/16 income

tax liability

• Potentially 64% tax relief

Seed EIS - CGT exemption

• Catherine now sells the SEIS shares in July 2018 for

£350,000

• Gain on seed EIS company shares EXEMPT
• No tax on reinvested gain of £80K
• But what if Co goes bust?
• What is her risk?
• SEIS cost her £80K – (£5,600 + £40,000) = £34,400
• Set loss against Income – saves 45% = £15,480

New Seed EIS – Example

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• Johnny started a new software company 2013
• Needs £20,000 for new computers, plant
• His aunty Betty has £20,000 in bank – minimal interest
• She buys shares in nephew’s company
• £10,000 income tax relief (50%)
• Gains up to £10,000 exempt
• No CGT on disposal of shares after 3 years
• Company goes bust – set loss against income (s131)

Making Seed EIS work for your clients

• Reinvest the property gain in EIS company shares
• Defers the gain until the shares are sold
• Gain comes back into charge at the general rate of

CGT, currently 20% for a higher rate taxpayer.

• No minimum holding period for EIS deferral relief
• (3 years for income tax relief and unconnected)
• The reinvestment must take place during the period of

12 months before to 36 months after the date of disposal of the property.

Property disposals – 20% instead of 28% CGT

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• Cliff sells property in November 2016 for £300,000

making a capital gain of £100,000.

• Reinvest the £100,000 gain in EIS shares Jan 2017.
• The £100,000 gain would be deferred until the EIS

shares are sold and the £28,000 CGT not payable

• If unconnected deduct £30,000 (30%) IT liability
• Cliff sells the EIS shares in February 2020 for £105,000.
• £5,000 gain on the EIS shares exempt from CGT
• The £100,000 deferred gain comes back into charge at

the general rate 20%, so just £20,000 CGT payable.

Property disposals – 20% instead of 28% CGT

Capital gains by companies

42 Mr Bloggs 100% of A and B

Should we form a group?

A Ltd B Ltd 10% CGT if sell B Ltd (entrepreneurs relief)

Mr Bloggs No tax if sell B Ltd (SS exemption)

ER or SSE? SSE for serial entrepreneur:

A Ltd B Ltd Bloggs Holdings Ltd

43 CG EXEMPTION NO CAPITAL LOSS .

• Subst. Shareholding exemption

TRADE CO TRADE CO 10%

• Investing company =trading company or trading group
• Target - trading co or group
• Substantial = 10% issued shares
• Direct or indirect holding
• Must hold shares >1 year

SSE - Conditions

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• “Trading company” and “trading group”
• Essentially same as CGT business taper:
• “company carrying on trading activities whose activities

do not include substantial activities other than trading activities”

• Substantial = 20%

SSE - interpretations

• Stock => fixed asset = DI profit or loss!
• Use mv - Sharkey v Wernher
• Fixed asset => stock = gain
• Again use mv
• Or elect – stock @ mv less gain
• (Mv plus capital loss) – turns into trading loss!

Appropriations to/from stock

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Inheritance Tax Refresher and Update

• Tax on value of estate at death
• + Gifts within 7 years of death
• 40% tax after £325,000 => 2017/18
• Conservative manifesto £1,000,000 ???
• Therefore give away early?
• Retain sufficient to live on!

IHT Basics

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• UK domiciled – IHT on worldwide assets
• Remain UK domiciled for 3 years if emigrate
• Non UK domiciled – IHT on UK situs assets only
• Deemed UK domiciled for IHT if resident for 17 years
• Planning:
• Put Foreign assets into trust while non – Domiciled
• Assets are Excluded Property – No UK IHT

IHT Basics – Importance of Domicile

• Exemptions – what are there?
• Annual
• Wedding
• Normal expenditure (gifts out of income)
• Family Maintenance
• Charity
• Watch interspouse if one non dom (now £325K)
• Watch interaction between chargeable gifts and PETs =

14 year planning?

Annual IHT Planning

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• Annual exemption - £3,000
• Small gifts - £250
• Marriage exemption
• Parents - each

£5,000

• Grandparents,remoter

£2,500

• Spouses

£2,500

• Others

£1,000

• Normal expenditure out of income

Exempt transfers -lifetime only

• Applies to deaths after 6 April 2012:
• 36% IHT rate if bequeath >10% of estate to charity
• 10% of estate after exemptions, reliefs, NRB
• Add back charitable legacy = 10% of “baseline amount”
• Example:
• George, single man, dies leaving estate £2,325,000

after exemptions and reliefs

36% IHT if leave 10% to charity

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• No charitable bequest:
• IHT payable £2,000,000 @ 40% = £800,000
• Net estate £1,200,000 (+ £325,000)
• £200,000 left to charity:
• IHT payable £1,800,000 @ 36% = £648,000
• Net estate £1,152,000 (+ £325,000)
• £200,000 bequest saves £152,000 tax (76%)

IHT charity bequest example

• Divide estate into 3 components:
• Survivorship component = property which passes

automatically to a surviving joint owner.

• Settled property component = assets in trusts where

deceased had a life interest

• General component = the rest , i.e. free estate
• 10% test applied to each component separately, or can

combine

10% IHT if leave 10% to charity

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• THREE CONDITIONS - S21(1) IHTA 84
• “Part of the normal expenditure” of transferor
• “(Taking one year with another) it was made out of

his income”

• “Was left with sufficient income to maintain his

normal standard of living”

Gifts out of income

• Potentially exempt transfers:
• Outright gift to individual
• to life tenant trust to 22.3.06
• to A&M trust to 22.3.06
• Other transfers chargeable at time of gift,
• E.g. Transfer to discretionary trust
• Most trusts from 22.3.06
• Transfer of value by close company

Lifetime gifts

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• Spouse exemption
• (Non domiciled £325,000 limit)
• Charities
• Political parties
• Heritage assets – absolute and conditional exemption

Exemptions during lifetime and death

• PETS – can be done very late in life – for IHT
• Gifts within annual exemptions - £3,000 pa
• Over 10 years - couple can give away £66,000
• Watch CGT on gifts – not if cash
• Hold over? S165 or s260 TCGA
• Take gain if within £11,100 AE

Lifetime gifts

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• Care in dealing with assets qualifying for APR/BPR
• Sale of shares/business for cash

= no BPR on cash + CGT due Retention of share /business = 100% BPR and no CGT on death Consider transfer of assets between spouses to wash out CGT – no CGT on death, uplift to MV

Terminal Illness planning

• From 9 October 2007
• Unused nil band (%) from first spouses death

transferred to survivor

• Utilised on second death
• No action required on first death
• Claimed by LPR on second death

Married couples & IHT nil band transfer

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• Dad dies January 2008
• All of estate left to Mum, no lifetime gifts
• Nil band used = 0%, balance 100%
• Mum dies 2015, nil band £325,000
• Mum gets 200% = £650,000 nil band

Nil band transfer example

• Dad dies October 2007 – Nil Band £300,000
• £100,000 to children, balance to Mum
• Nil band used = 1/3, balance 2/3
• Mum dies 2025, say nil band £360,000
• Mum gets 166.7% = £600,000 nil band

Nil band transfer example

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• Additional £175,000 IHT relief for family home
• No IHT on transfer of family home <£1,000,000 =

(£325,000 + £175,000) x 2

• Also available if downsize
• Like NRB transferred to surviving spouse if unused
• Taper relief by £1 for £2 over £2,000,000 before IHT

reliefs – e.g. BPR, APR

• May need to review client’s Will’s and estate

planning

Additional Main Residence Nil Rate Band

• Additional IHT relief for family home, phased in:
• £100,000 – 2017/18
• £125,000 – 2018/19
• £150,000 – 2019/20
• £175,000 – 2020/21
• Then increased with CPI

IHT Family Home Allowance

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• Taper relief by £1 for £2 over £2,000,000 before IHT

reliefs – e.g. BPR, APR

• Family home £900,000, business worth £5m would

mean no Family Home relief!

• Couple with £2m home plus £1m savings owned jointly

= £1,500,000

• Leave half share to spouse on first death
• On second death, estate = £3m, no relief

IHT Family Home Allowance - tapering

• Additional NRB available if downsize:
• 1. to a less valuable residence and that residence,

together with assets of an equivalent value to the ‘lost’ RNRB, has been left to direct descendants, or

• 2. sold their only residence, and the sale proceeds, or

assets of an equivalent value, have been left to direct descendants, or

• 3. has otherwise ceased to own their only residence,

and other assets of an equivalent value have been left to direct descendants

Residence Nil Rate Band - Downsizing

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• Individual dies on or after 6 April 2017
• The property disposed of must have been owned by

the individual and it would have qualified for the RNRB had the individual retained it

• Less valuable property, or other assets of an

equivalent value if the property has been disposed of, are in the deceased’s estate

• Less valuable property, and any other assets of an

equivalent value, are inherited by the individual’s direct descendants on that person’s death

RNRB – Downsizing Conditions

• Downsizing or the disposal occurs after 8 July 2015
• No time limit on the period in which the downsizing or

the disposals took place before death

• Any number of downsizing moves between 8 July

2015 and the date of death of the individual

• Would also include disposing of part of a property

(including land occupied and used as a garden or grounds) or a share in it

• Where a property is given away, assets of an

equivalent value to the value of the property when the gift was made must be left to direct descendants

RNRB – Downsizing – Further Conditions

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• Widow sells a home worth £400,000 in August 2020

and moves to a home worth £210,000.

• At the time of the sale the available RNRB is £350,000
• By downsizing, she has potentially lost the chance to

use £140,000 or 40% of the available RNRB

• When the widow later dies in October 2020, the home is

worth £225,000 and is left to her children together with £500,000 of other assets.

RNRB – Downsizing – Example 1

• The estate can use an RNRB of £225,000. However,

the widow was eligible for an RNRB of £350,000 had she not downsized. The estate can therefore claim an additional RNRB of 40% of the available RNRB (40% x £350,000) or £140,000.

• This would give a total RNRB of £365,000 (£225,000 +

£140,000).

• But this is more than the maximum available RNRB

(£350,000) so the additional RNRB is restricted to £125,000

• Plus ex husband’s unused NRB

RNRB – Downsizing – Example 1

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Business Property Relief

• 100% on unquoted shares + AIM
• 50% for control of quoted co.
• 100% on partnership interest, sole trader
• 50% on assets used in company (controlled) or

partnership

• Not investment, dealing cos – IRC v George, Farmer
• Own relevant property for 2 years

Business property

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• Relief denied if binding contract for sale
• Lifetime gifts
• Asset must still be owned by donee at donor’s death
• Must qualify for BPR/APR at death
• Excepted assets – cash? Barclays Bank Trust Co
• Assets used by family company?

Business property (APR) - danger areas

Own property personally - BPR?

BLOGGS LTD MR BLOGGS

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The End Any Questions?