IHTM42088 - Ten year anniversary: Tax calculation: the rate of tax: Step 4: relief for assets that have been relevant property for less than the full 10 years
Relief against the rate of鈥疘nheritance Tax (IHT)鈥痗alculated at step 3 is available in cases where some of the relevant property subject to the charge to IHT on the anniversary has not been relevant property for the full ten听测别补谤蝉.鈥�听
This situation arises鈥痠f in the鈥�ten-year听period鈥�听
new property has been added to the trust by the settlor听
income of the trust has been accumulated by the trustees听
some of the property in the trust that was non-relevant property has become relevant property because the trusts have changed听or because听the settlor has become long-term UK resident.听(IHTM47000)听
The initial听rate of IHT鈥痺ill be reduced鈥痶o reflect the time that property in question was鈥痭ot鈥痳elevant property. For this purpose,鈥痶he鈥�ten听year听period is divided into 40 quarter years.鈥疭o,鈥痠f some of the property at the anniversary has only been in the settlement for 5 years (20 quarter years) then the rate on that property will be half (20/40ths) of the initial听ra迟别.鈥�听
This can be straightforward to apply if the added property is clearly identifiable.鈥�听
Example 1鈥�听
Jane gifted 拢500,000 to trustees on 2 January 2010 having made no previous听gifts or trusts.鈥赌�听
On the 1 June 2018 she added a painting worth 拢100,000.鈥�听
At the鈥痶en-year鈥�anniversary听the total fund was valued at 拢750,000; the initial听rate of IHT is 3.4% and the IHT before any rate relief is 拢25,500.鈥赌�听
The value of the painting at that time was still 拢100,000.鈥�听
We know that the painting was not in the trust for 8 years and 1 (complete) quarter year, a total of 33 quarter years out of 40. So, we only charge 7/40ths of the initial听ra迟别.鈥�听
So, the final IHT after rate relief is 拢22,695:鈥��听
Painting鈥�100,000鈥痻鈥�3.4%鈥痻鈥�7/40鈥�= 拢595鈥�听
Other鈥�650,000鈥痻鈥�3.4%= 拢22,100鈥�听
But the relief can be tricky to apply in practice when the trust fund is merged or re-invested.鈥�听
Example 2听
Jane gifted 拢500,000 to trustees on 2 January 2010 having made no previous听gifts or trusts.鈥赌�听
On the 1 June 2018 she added 拢100,000.鈥�听
The trustees invested the contributions in quoted shares and the portfolio changed over time.鈥�听
At the鈥痶en-year鈥�anniversary听the total fund was valued at 拢750,000; the initial听rate of IHT is 3.4% and the IHT is 拢25,500.鈥�听
In this case you do not necessarily know how much of the second transfer of 拢100,000 is reflected in the value of 拢750,000.鈥赌�听
A simple and acceptable solution is鈥痶o establish听the value of the fund prior to the addition and assume that the fund has grown evenly subsequently.鈥赌�听
If the value of the fund on 31 May 2018 was 拢600,000 then the total fund became 拢700,000 and that combined fund has grown by approximately 7%听to 拢750,000 by the time of the anniversary.鈥�听
On that basis the final IHT after rate relief is 拢22,499:鈥�听
Added fund鈥�107,000鈥痻鈥�3.4%鈥痻鈥�7/40= 拢637鈥�听
Original fund鈥�643,000鈥痻鈥�3.4%= 拢21,862鈥�听
There may be other ways to address the issue (which also arises when there are exit charges out of a merged fund). You should bear in mind the tax at risk and adopt a common-sense approach.鈥�听
IHTA84/S66(2) relief can arise in relation to a number of听additions made during each ten-year period, and鈥痑s鈥痠nflation is bound to change the value of the capitalised sums鈥痠t is necessary for trustees to keep good records,鈥痵o that the ten-year anniversary听value of each addition can be identified.鈥赌�听
础肠肠耻尘耻濒补迟颈辞苍蝉鈥�听
Accumulations of income convert the income into capital at the date the accumulation is made (IHTM42162).鈥疶his is why鈥痶hey feature so often in claims for S66(2) relief.鈥�听
It is the responsibility of the taxpayer to claim any uplift between the addition and the鈥�ten-year鈥痑nniversary value.鈥赌��听
If there is鈥痭o power of accumulation, either because the power has expired or never existed, then subsequent听income does not convert to capital and the income is not within the TYA charge.鈥疘n these circumstances the relief is not required.鈥�听
Example听
Assume that 拢100,000 of the 拢1,000,000 relevant property in example 2 of IHTM42087 was an accumulation of income which became capital on 20 December 2001. That part of the trust had not been relevant property for 23 complete successive quarters out of the 40 since the trust commenced.听
The relief against the full chargeable value of 拢56,620 is听
| 拢100,000 x settlement rate of 5.662% | x 23/40听(quarters not relevant property) | = 拢56,620 - 拢3,255.65 | = 拢53.364.35 Tax to pay |
Example听
Donna settled foreign property in a settlement in the first quarter of Year One when she was not听long-term UK resident. The property in the settlement is excluded property (IHTM04251) and therefore is not relevant property.听听
In the third quarter of Year Six, Donna becomes long-term UK resident. At this point听the property in the settlement ceases to be excluded property and therefore becomes relevant property.听听
At the ten-year anniversary听the property in the settlement has been relevant property for 17 complete quarters. The rate at which tax will be听charged is 17/40听of the original rate.听