Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on business property relief applicable to legacy.
‘I have a case in which the deceased left a will with a legacy of the nil rate band to his two daughters in equal shares. The definition of the legacy set out in the will is ‘such sum as is equal to the upper limit of the nil per cent rate band in force at my death, etc’ and refers to the IHTA 1984, with a deduction for any chargeable lifetime transfers. The residue passes to his widow. He made no chargeable lifetime transfers and so the full nil rate band is available. Among the assets were shares in some family enterprises that are clearly trading companies and seemingly tick all the boxes to claim business property relief from inheritance tax at 100%.
My concern is whether IHTA 1984, s 39A applies. My understanding is that, due to the way the legacy is defined, the daughters will receive no more than £325,000.
However, I am wondering whether the business property relief applies to part of the pecuniary legacy, meaning that part of the deceased’s nil rate band has not been used and so will eventually be transferable to the widow’s estate.
If that is so, I am guessing HMRC will not look at this until her death because no tax is due on the estate. But perhaps accurate records should be made now ready for that time. Further, I am minded to suggest a deed of variation to redirect the business property relief assets into a discretionary trust with the widow and daughters as beneficiaries, although presumably they will all be settlors for the purposes of income tax and capital gains tax?’
Query 19, 247– Confused.
Terry’s reply
Use the variation to make a gift of the relievable assets to the daughters.
‘Where an estate is likely to include assets that benefit from agricultural property relief or business property relief it is considered best practice to make those assets the subject of specific gifts precisely because of the operation of IHTA 1984, s 39A. In Confused’s case, some business property relief would be afforded to the nil rate band gift, thereby reducing the taxable value below £325,000 so that the unused proportion of the deceased’s nil rate band would transfer to his widow.
An instrument of variation under s 142 is not at all retrospective for income tax purposes. So, the widow and daughters would be the income tax settlors of the mooted discretionary trust and would be taxable on the relevant proportions of income regardless of to whom the trustees paid it.
For capital gains tax, the position is governed by TCGA 1992, s 68C and, since the assets were not settled by the deceased’s will, the mother and daughters will also be the capital gains tax settlors. However, after the abolition of s 77 (effective 6 April 2008), which previously attributed trustees’ gains to settlors with interests in the settlement, this is of little practical effect.
Another possibility would be for the variation to make a specific gift of the relievable assets to the daughters and perhaps remove the nil rate band gift which would then pass to the widow. In that way, the deceased’s nil rate band would transfer in full to the widow. She might later buy the relievable shares from the daughters and thereby achieve a ‘double dip’ of business property relief as long as she then owned them for at least two years.’
The article is also available on the Taxation website.
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