Writing for Taxation magazine, BKL tax consultant Terry Jordan explores the proposed Inheritance Tax Act 1984 (Amendment) (Siblings) Bill and IHT implications for brothers and sisters.
Key points
- A form of consanguinity relief for spouses and civil partners, children and dependant relatives is afforded by IHTA 1984, s 11.
- A private members’ bill starting in the House of Lords has introduced the Inheritance Tax Act 1984 (Amendment) (Siblings) Bill.
- Unless TCGA 1992, s 58 is also amended the transferor sibling could land themself with a capital gains tax bill on a lifetime transfer of a chargeable asset.
- If the home is jointly owned by siblings it should be owned as tenants in common.
The European Court of Human Rights case of Burden and another v UK (29 April 2008) was reported in ‘Too sisterly’ (Taxation, 1 May 2008, page 479). Joyce and Sybil Burden were then aged 88 and 81 respectively and had lived together for many years. Neither had ever married. The sisters argued that the relevant UK inheritance tax provisions were discriminatory in denying them the equivalent of the spouse exemption on the first death with a suggestion that their family home would have to be sold to pay the tax.
By a bare majority, the court held that there had been no discrimination under Article 14 of the European Convention on Human Rights (the Convention) in respect of the right to peaceful enjoyment of property (Article 1 of the First Protocol to the Convention).
Consanguinity
In a number of European countries that still impose taxes on death, there are forms of consanguinity relief, in addition to that for spouses and civil partners, where the effective rates of tax depend on the relationship between the deceased and the recipients. That is the case in Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands and Spain.
In the UK, IHTA 1984, s 18 provides that a transfer of value is exempt to the extent that the value transferred is attributable to property which becomes comprised in the estate of the transferor’s spouse, or, with effect from 5 December 2005, the transferor’s civil partner. The exemption is available to divorcing couples until the decree absolute has been issued which contrasts with the position for capital gains tax.
If the transferor spouse/civil partner is domiciled in the UK and the recipient is not, s 18(2) limits the exemption to the same figure as the ordinary nil rate band, currently £325,000. The reduced exemption can be used up on lifetime transfers leaving none available to the estate on death. Readers with very long memories will recall that the spouse exemption in its current form was introduced to estate duty by FA 1972, s 121 with effect from 22 March 1972 and with a cap of £15,000. Until then there was no exemption on the first death. If the assets were settled on the widow(er) who was not competent to dispose of them, the value was left out of account on the second death and that treatment has been preserved for IHT purposes by IHTA 1984, Sch 6 para 2.
A form of consanguinity relief for spouses and civil partners, children and dependant relatives is afforded by s 11 ‘Dispositions for maintenance of family’. However, as discussed in the replies to a recent Readers’ forum query, ‘Are dispositions for family maintenance transfers of value?’ (14 July 2022, page 24), the section applies only to lifetime dispositions and not to those deemed to be made on death.
Siblings relief
The Lord Lexden OBE (formerly Alistair Cooke) has introduced as a private members’ bill starting in the House of Lords, the Inheritance Tax Act 1984 (Amendment) (Siblings) Bill [HL] to make transfers between siblings exempt in certain circumstances. It had its first reading in the Lords in early July this year. (It appears from Hansard that the same bill had a first reading in early 2020.) If enacted its provisions would come into force two months after it is passed and would apply to England and Wales, Scotland and Northern Ireland.
The substantive provisions are contained in clause 1(2) of the bill:
‘After section 18 insert –
‘18A Transfers between siblings
1) A transfer of value is an exempt transfer to the extent that the value transferred is attributable to property which becomes comprised in the estate of a sibling of the transferor to whom subsection (2) applies or, so far as the value transferred is not so attributable, to the extent that that estate is increased.
2) This subsection applies to a sibling who has –
a) ordinarily resided in the same household as the transferor for a continuous period of seven years ending with the date of the transfer; and
b) attained the age of 30 before that date.
3) For the purposes of this section, “sibling” means a brother, sister, half-brother or half-sister of the transferor.’
The exemption would apply to lifetime transfers as well as to those made on death. On death, siblings could inherit under the terms of a will or under the intestacy provisions.
The Office for National Statistics defines household as follows:
‘A “household” is (current definition, from 2011) one person living alone, or a group of people (not necessarily related) living at the same address who share cooking facilities and share a living room, sitting room or dining area. A household can consist of a single family, more than one family or no families in the case of a group of unrelated people. A helpful way to think of the relationship between families and households is to consider families as a subset or portion of a household, as more than one family can live in a household.’
The age stipulation of 30 applies to the recipient sibling and there is apparently no such requirement in the case of the transferor.
The bill does not contain the equivalent of s 18(2) and, while unlikely, the transferor sibling might be domiciled in the UK and the recipient domiciled outside the UK in which case moving the transferred assets outside the UK or reinvesting them in authorised unit trusts or open-ended investment company shares (OEICS) would turn them into excluded property within s 6 and outside the scope of IHT.
Sections 8A to 8C provide for the transfer of unused ordinary nil rate band between spouses and civil partners and the bill makes no such provision. Similarly, sections 8D to 8M deal with the residence nil rate band and s 8G defines the ‘brought-forward allowance’ from the estate of a spouse or civil partner.
The bill does not impose the requirement that the siblings should be childless, and it might be that the estate of the recipient of an exempt transfer could benefit from the residence band if a share in the home subsequently passed to a direct descendant.
Gifts with reservation of benefit revival
When inheritance tax replaced capital transfer tax (CTT) on 18 March 1984 the old estate duty concept of gifts with reservation of benefit (GROB) was revived – there was no need during the CTT era with its original lifetime cumulation of gifts that were not exempt when made. Finance Act 1986, s 102(5) provides that the GROB rules do not apply to certain gifts that are exempt when made including the IHTA 1984, s 18 spouse/civil partner exemption.
In summary, the bill if passed would apparently need consequential amendments to be made to the IHT legislation. In addition, unless TCGA 1992, s 58 is also amended the transferor sibling could land themself with a capital gains tax bill on a lifetime transfer of a chargeable asset.
I have not been able to find a cost estimate of the proposed exemption and assume it would not be great if the charge is preserved on the second death as with the spouse/civil partner exemption.
Action to take now
In the interim how should siblings like the Burden sisters be advised? The first point to note is that unlike with spouses and civil partners, property held by another sibling is not ‘related property’ within IHTA 1984, s 161 (this might be another consequential amendment made if the bill is passed). Accordingly, if the home is jointly owned by siblings each share should benefit from a discount for joint ownership of perhaps 10%. It should be owned as tenants in common, not beneficial joint tenants, so that the share of the first to die passes by will.
The next point is, so far as possible, to avoid aggregation of wealth in the hands of the surviving sibling otherwise the danger is that the same property will suffer IHT on both deaths, subject to quick succession relief under s 141 if the deaths occur within five years of each other. The share of the property of the first sibling to die should be left to other beneficiaries or on discretionary trusts, with care being taken to ensure that the survivor does not take an immediate post-death interest within the first two years because that would have the effect of putting the value into the survivor’s estate.
The surviving owner, as tenant in common, would have ‘promiscuous’ rights of occupation of the whole. The share will fall within the relevant property regime but ten-year charges at a maximum rate of 6% over the available nil rate band will almost certainly be less than the 40% charge on death.
If not already done, the survivor might consider borrowing on the retained share of the property (albeit lenders will be reluctant when a trust is involved) and either giving away the sum borrowed with a seven-year IHT tail or perhaps investing in a discounted gift trust.
In simple terms, an irrevocable gift of capital is made which is invested in an insurance bond. At inception the settlor reserves an ‘income’ (in reality a return of the original capital) of which up to 5% a year is tax-deferred for 20 years. Survival for the normal seven years affords full exemption from IHT and if the settlor dies prematurely the gift is discounted to reflect the ‘income’ stream.
Nowadays the arrangements must be made with bespoke underwriting according to the client’s age and state of health. Rather unsportingly HMRC’s view is that people aged over 90 do not have a life expectancy, confirmed in Bower v CRC [2009] STC 510.
To the extent that there are assets that would not trigger a capital gains tax liability on disposal the survivor might consider a portfolio of shares on the alternative investment market (AIM), some but not all of which would qualify for 100% business property relief after two years’ ownership. Suitable investment advice would of course have to be taken before any decisions were made.
In conclusion, and sticking with the burden theme, ‘He ain’t heavy, he’s my brother’.
This article was first published in Issue 4856 of Taxation magazine and is available here on the Taxation website.
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