Chargeable transfersThis guidance note provides an overview of the basic principles of inheritance tax, when it is charged and how it is calculated. It contains links and references to other parts of the module where more details can be found.Transfers of valueInheritance tax is based on the concept of a transfer of value. A transfer of value is defined as a ‘disposition made by a person (the transferor) as a result of which the value of his estate immediately after the disposition is less than it would be but for the disposition’. Thus the definition identifies the key event as a ‘disposition’. A disposition is, typically, a gift. There must be an element of bounty, otherwise the value of the transferor’s estate would not decrease. A disposition can be:•a lifetime gift from one person to another. The gift could be of money or any type of asset, such as a picture, shares, or land•a lifetime gift of property from a person to trustees who will look after the property for the beneficiaries of the trust•a gift with reservation. That is where a person transfers ownership of property but retains rights or benefits from it. For details of the treatment of such gifts, see the Gifts with reservation ― overview guidance note and other notes in that sub-topic•the transfer, when someone dies, of the whole of his property to new owners•a distribution of trust assets to a beneficiaryIn addition to occasions when property is actually
Assignment and grant of leases for capital gains taxA lease is the right to use an asset. Where the asset in question is land or buildings, the lease is the right to occupy the land or buildings for a specified period of time, usually in return for a specified rent. Contrast this to a freehold, which is the outright ownership of the property and the land upon which it is built. Freehold and leasehold are separate assets and, as such, a lease can be bought and sold in its own right as well as granted (ie created from a freehold or another leasehold).This guidance note considers the capital gains tax position on:•assignment of a long lease (over 50 years to run)•assignment of a short lease (50 years or fewer to run)•grant of a long lease•grant of a short leaseAssignment is the legal term for disposal of a lease.Disposals of leases may need to be reported and any estimated capital gains tax paid with 60 days of the conveyance of the land. See the Disposals of UK land ― capital gains tax compliance regime guidance note. Whether or not the disposal has already been reported to HMRC, if a self assessment tax return is required, the disposal should be reported on the capital gains summary supplementary pages. Computations of the chargeable gain or allowable loss must be submitted with the tax return.When calculating the capital gain or loss, you should consider the HMRC ‘Capital gains tax
Qualifying interest in possession trusts ― IHT treatmentTrust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax on the following occasions:•on the death of the beneficiary with the interest in possession•on the death of the beneficiary within seven years after a transfer or lifetime termination of his interest•on the transfer or conversion of the interest to a non-qualifying or discretionary interestProperty in which a QIIP subsists is not relevant property so it is not subject to principal and exit charges during the life of the trust. See the Relevant property guidance note, and other notes in the 'relevant property' sub-topic for details of the relevant property tax regime.Death of the beneficiary with the qualifying interest in possessionWhen the beneficiary with the QIIP dies, the trust property will be valued and counted as part of the deceased estate, and the inheritance tax estate charge will be levied on that property (in addition to any other property that is in his estate). In valuing the trust property, the related property rules will apply. Once the inheritance tax estate charge has been calculated, the trustees of the interest in possession trust will be responsible for paying that part of the tax that relates to the settled property (with the personal representatives being primarily responsible for paying the balance).By contrast, a reversionary interest in settled property subject to a qualifying interest in possession is not included in the estate of the
Overview of the ATED regimeATED ― backgroundThe annual tax on enveloped dwellings (ATED) regime was introduced by FA 2013, Part 3 and was one element of a series of anti-avoidance measures that were designed to make it less attractive to hold high-value UK residential property through a corporate structure (or ‘envelope’). It should be considered in context with the charge to CGT on gains arising from the disposal of ATED-related properties (see ‘ATED-related gains’ below) and the 15% charge to SDLT on the transfer of such properties ― see the Stamp duty land tax ― basic rules guidance note.The ATED regime applies to high-value UK residential property owned on, or acquired after, 1 April 2013, by:•companies•partnerships with at least one company member, or•collective investment schemes (including unit trusts)Together these are referred to in the remainder of this guidance note as ‘non-natural persons’ or ‘NNPs’. The ATED charge applies regardless of where the NNP is established or resident and therefore applies to both UK and non-UK NNPs.Those within the ATED rules are subject to an annual property tax based on the value of the property held, although certain reliefs and exemptions are available. ATED also brings with it additional filing requirements for those within the scope of the provisions, even in cases where no tax charge is actually payable. The ATED rules are complex, and this guidance note outlines the main aspects of the regime only. For further detail on the ATED regime, see Simon’s Taxes B6.7
Excluded property and situs of assetsThe concept of excluded propertyInheritance tax (IHT) does not apply to excluded property. Specifically, this means that:•excluded property does not fall into an individual’s chargeable estate for IHT on death•excluded property is not included when calculating any transfer of value made by an individual (including that arising on the termination of a qualifying interest in possession)•excluded property is not ‘relevant property’, and therefore not subject to the periodic 10-year or exit charges on trusts•liabilities relating to excluded property are not deductible for IHT purposesThe domicile connectionThere are a number of categories of excluded property, the most important of which is property situated outside the UK, owned by a non-UK domiciled individual. An individual’s potential UK inheritance tax liability will therefore depend on:•his domicile status (see the Domicile for UK inheritance tax guidance note)•the location of his propertyIHTA 1984, s 6(1)Situs of assetsProperty is located in the place determined by the rules of common law. These are known as the lex situs rules. The situs of the most common assets are summarised below:LandIs located in the country where it is physically sitedChattelsAre located in the country where they are physically sitedSimple contract debtsAre located in the country where the debtor residesBank accountsAre located at the branch of the bank at which the account is heldSpecialty debts and negotiable instrumentsAre those made by deed or statute. If
Disclaiming a giftThe general law and disclaimersIf a beneficiary of a gift under a Will or intestacy refuses it before acceptance, this amounts to a disclaimer. The property then devolves to the person(s) next entitled according to the terms of the Will or intestacy and so, unlike a variation, it is not possible for the person disclaiming to redirect the property or control its ultimate destination.An effective disclaimer operates as an avoidance of a gift rather than as a disposition which re-directs the subject matter to someone else. Before disclaiming, it is important to find out what the effect will be. As a general rule, if a specific gift or legacy in a Will is disclaimed, it will fall into residue and the beneficiaries of the residuary estate will take the disclaimed gift in the appropriate shares.If a gift of residue is disclaimed and the Will includes a substitutional gift in the event of failure of the gift for any reason, the disclaimed share passes according to those provisions. If there is no effective substitutional gift, the disclaimed share of residue will be treated as a partial intestacy. It follows that if a gift of the whole estate is disclaimed, full intestacy ensues. Care must be taken, however, to be aware of the effect of the Wills Act 1837, s 33. If any child should predecease the testator leaving children of their own, the gift will pass to those children (ie the testator’s grandchildren). This could operate where a
Grants of leasesThe creation or ‘grant’ of a lease out of an existing lease or freehold is a part disposal of the existing asset. The capital gains position of the person or company making the disposal (the landlord) and the tenant depends on the length of the lease; whether the lease is a long lease, with a term exceeding 50 years, or a short lease, with a term of 50 years or less. The permutations are summarised in the table below and explained in more detail in the rest of this note.LandlordTenantGrant of long lease out of freehold or long sublease out of long leasePart disposal of freehold interest or long lease. The chargeable gain is calculated using the normal part disposal formulaNo trading deduction for premium paidGrant of short lease out of freehold or short sublease out of long leasePart disposal of freehold or long lease. The chargeable gain is calculated using a modified part disposal formula. Part of the premium is treated as an income receipt. See the Premiums on leases guidance noteA trading deduction is available where the land subject to the sublease is used for trade. The deduction is based on the part of the premium treated as income of the landlord, divided by the number of days in the lease period. See the Premiums on leases guidance noteGrant of short sublease out of short leasePart disposal of interest in short lease.
Capital goods scheme ― transfers, disposals and VAT groupsThis guidance note provides an overview of the CGS implications of the following transactions:•transfer of assets as part of the transfer of a business as a going concern (TOGC)•disposal of a capital item•VAT group implicationsThis note should be read in conjunction with the Introduction to the capital goods scheme and Capital goods scheme ― intervals and adjustments guidance notes. See ‘How to apply the Capital Goods Scheme’ by Jackie Yarrow in Tax Journal, Issue 1053, 20 (15 November 2010).Transfer of a business as a going concernIf a business transfers a capital item as part of the TOGC, it will need to give the purchaser details of the capital item. The purchaser will be required to continue to make any further adjustments due in respect of the capital item for the remaining intervals. The following implications need to be considered by the parties involved in the TOGC.Purchaser takes over the existing VAT registration numberIf the purchaser decides to keep the existing VAT registration number, the following applies:•the adjustment interval in which the business is transferred continues without a break•the seller is not required to make any CGS adjustments for that interval•the purchaser is responsible for completing the CGS adjustment calculation for the whole of that interval. The interval ends on the last day of the transferee’s longer period ending immediately after the transfer (or if no longer period then applies, on the last day of the transferee’s tax year following the day of transfer). The transferee must make any adjustment for that interval and any remaining intervals in the normal way. Longer periods and tax years both normally run to the following 31 March, 30 April or 31 May depending upon the owner’s VAT periods.•the purchaser is responsible for continuing to make any future adjustments required in respect of that asset for the remaining intervalsPurchaser does not take the existing
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