The COVID-19 pandemic is having a huge impact on the UK economy. The Institute of Fiscal Studies recently reported that the FTSE all-share index fell by 35 per cent between 2 January and 23 March (www.ifs.org.uk/publications/14773).
Furthermore, the Express reported that experts predicted the average house price in the UK will fall by 13 per cent by the end of 2020 (https://tinyurl.com/Express-PF-CV19).
For inheritance tax (IHT) purposes, the decrease in asset values will result in the current value of estates falling significantly for many individuals. It will be scant consolation that IHT may possibly be saved on 40 per cent of the fall in value of an asset on death.
However, decreases in asset values offer a lifetime IHT planning opportunity, where the value of an asset is expected to appreciate. An individual who intends gifting an asset to (for example) a family member (eg adult offspring) should consider making the gift while the asset value is depressed. The lifetime gift of an asset to another individual is generally a potentially exempt transfer (PET), which becomes exempt if the donor survives at least seven years.
If the donor dies within that period, the value of the failed PET for IHT purposes is taken to be its value at the date of the original transfer, not the value on death. Of course, the gift should be outright with no strings attached, to prevent the ‘gifts with reservation’ anti-avoidance provisions becoming an issue (FA 1986, ss 102-102C, Sch 20).
After the event
Very sadly, many thousands of people in the UK have lost their lives during the COVID-19 pandemic. IHT is charged on the estate of a deceased person as if, immediately before their death, they had made a transfer of value. The value transferred is deemed to equal the value of their estate immediately before death (IHTA 1984, s 4(1)).
Where an asset was gifted within seven years before death, and the market value of the gift (whether a failed PET or chargeable lifetime transfer) has fallen, tax (or additional tax) payable on transfers of the property may be relieved where the value of the gift has fallen between the time the gift was made and death. The tax is calculated as if the value transferred were reduced by the difference; in effect, the lower value is substituted (IHTA 1984, ss 131–140).
The relief is generally useful; however, it is not always as straightforward as might first seem. For example:
- The relief does not affect the transferor’s cumulative total (which remains at its original figure for the purpose of taxing any later lifetime transfers and the estate on death), or the tax originally charged at lifetime rates on an immediately chargeable lifetime transfer;
- When valuing property transferred in order to ascertain whether relief may become available, no account should be taken of related property (under IHTA 1984, s 161) or any other assets owned by the transferor or transferee; the values to be compared are the values, as at the dates of transfer and death or sale, of the transferred asset itself (see HMRC’s Inheritance Tax manual at IHTM14626);
- Relief does not apply if the transferred asset is tangible movable property that is a ‘wasting asset’ (ie an asset with a predictable useful life not exceeding fifty years immediately before the transfer) (IHTA 1984, s 132);
- An asset is a wasting asset if it had a predictable useful life not exceeding 50 years immediately before the transfer;
- In the case of a transfer that was immediately chargeable at lifetime rates, the relief does not give rise to a repayment or remission of the tax that has already become payable during the transferor’s life.
Example: ‘Fall in value’ relief
James gives an investment property to his daughter Sammy in October 2018, which was then worth £300,000. James died in May 2019, when the value of the property had fallen to £250,000. This value can be substituted for relief purposes.
However, if Sammy had sold the property in February 2019 for £275,000, that would represent the substituted value for IHT purposes (IHTA 1984, s 131(1)).
A claim for the relief must be made by a person liable to pay the tax (or additional tax) not more than four years after the date of the donor’s death (IHTA 1984, s 131(2ZA)). Information on making the claim can be found at IHTM14627.
Other forms of IHT relief may also be useful in appropriate circumstances.
For example, IHT relief is available broadly where an interest in land (including buildings) in a person’s estate immediately before death is sold by ‘the appropriate person’, ie the person liable for the IHT thereon (normally the personal representatives) within three years of the death at a genuinely lower value (see IHTA 1984, ss 190–198). That value is then to be the taxable value, subject to certain conditions.
If the appropriate person (acting in the same capacity) sells further interests in land within the fourth year of death, all the sales by that person are generally taken into account (under IHTA 1984, s 197A), unless the sale value would exceed the value on death (or in certain other circumstances; see IHTM33074).
As with ‘loss on sale’ relief this post-death loss relief is potentially difficult and contains possible pitfalls. For example, if the land sold was held in joint ownership, care needs to be taken when making a loss relief claim if the value of the property was subject to a discount on death for IHT purposes, as the discount does not apply post-sale.
A claim for the relief (on form IHT38) must be made by the appropriate person (IHTA 1984, s 191(1)(b)). The claim must be made within four years of the end of the three-year period during which qualifying sales can be made (IHTA 1984, s 191(1A)).
HMRC provides detailed guidance on these potentially complex provisions at IHTM33000–IHTM33182.
Sales of related property within three years after death
Another form of relief (IHTA 1984, s 176) applies where, within three years after a person’s death, there is a sale of any property comprised in his estate immediately before his death which was valued for IHT purposes under the ‘related property’ rule (in IHTA 1984, s 161).
If the relief applies, the sold property may be re-valued at the date of death without taking into account the related property or property passing under another title, with which it was originally valued.
As with the other reliefs, there are various conditions to be satisfied. For example, the vendors must be the persons in whom the property is vested or the deceased’s personal representatives; the sale must be at arm’s length for a freely negotiated price (IHTA 1984, s 176(3)(b)), and must not be in conjunction with other related property sales; and the vendor and the purchaser must not be connected.
A claim (under IHTA 1984, s 176(2)) can then be made that the property at the death be valued freed from the related etc property provisions.
Time for a review
At the time of writing, there is no telling how long the current economic slump is likely to continue. However, it would seem an appropriate time to review the affairs of clients with possible IHT exposure on their estates, including those who have tragically died from COVID-19.
The above is based on an article first published on Accountingweb (www.accountingweb.co.uk).
Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a tax consultant with The TACS Partnership email@example.com), co-founder of TaxationWeb (www.taxationweb.co.uk) and Editor of the Tax Annuals 2020/21 (Bloomsbury Professional). He is also co-author of Ray & McLaughlin’s Practical IHT Planning (Bloomsbury Professional).