Annual exemptions and potential exemption

Trusts Discussion
1

Does anyone else share my frustration about HMRC’s continuing refusal to acknowledge the clear meaning, and even the existence, of IHTA s 19(3A)?

The section provides:

(3A) A transfer of value which is a potentially exempt transfer—

(a) shall in the first instance be left out of account for the purposes of subsections (1) to (3) above [the annual exemption of £3,000];
and

(b) if it proves to be a chargeable transfer, shall for the purposes of those subsections be taken into account as if, in the year in which it was made, it was made later than any transfer of value which was not a potentially exempt transfer.

Clear and straightforward you would think? But no. IHTM14143 tells us:

“If the transferor has made transfers to more than one liable person on different days in the same tax year, then apply the annual exemption to the earliest transfer first. It does not matter whether the transfers are potentially exempt or immediately chargeable.”

HMRC’s analysis depends on looking at the definition of a potentially exempt transfer in s3A, which provides that it is a transfer of value that would, apart from that section, be a chargeable transfer, coupled with the definition in s 2 that a chargeable transfer is a transfer of value that is not an exempt transfer. This twisted logic requires one to say that, because a transfer of value is exempt it cannot be a potentially exempt transfer, so s 19(3A) cannot apply to it.

Surely, all rules of construction, including the fact that it makes no sense to assume that an otherwise clearly worded subsection of a statute is without meaning, lead to the interpretation that, to resolve any conflict here, s 19(3A) should be read as beginning “A transfer of value which IF IT WERE NOT EXEMPT WOULD BE a potentially exempt transfer”?

And HMRC’s guidance in IHTM14143 does not even bother to explain that their analysis is that the first £3,000 is not a potentially exempt transfer.

The problem with this situation, of course, is that it is never going to be worth anyone’s while to litigate it. Does anyone have experience of arguing the point with HMRC?

My inclination would be to claim annual exemptions against a chargeable transfer, as if they had not been used by an earlier transfer of value, while pointing out in the white space of the IHT return that this follows the plain wording of the statute, that we are aware it differs from HMRC’s assertion in IHTM14143, but that we consider this to be what the statute says.

Anthony Nixon
Irwin Mitchell Private Wealth

2

I spent over 50 years in practice specialising in tax and trying to make HMRC obey the law on my clients’ behalf. I deeply resent their arrogation of the right to make it up when it suits them.

While I fully sympathise with Anthony Nixon’s frustrations, there must surely be a threshold whereunder HMRC’s hubris just has to be accepted as a pragmatic approach, provided that it is properly publicised

My latest crusade is HMRC’s refusal to publicise their view expressed in an enquiry that a “dwelling house” must have kitchen facilities of the kind prescribed by them. Of course they are fully entitled to argue that this undefined ordinary English word has that meaning, and in practice enforce it by their overwhelmingly advantageous position as a litigant, but there is no justification for secrecy. Self-serving promulgations of their views are commonplace.

Despite my natural antipathy I have to recognise that the existence of a tax authority is not totally sub-optimum and some latitude must be given to it in administration. But deliberately not seeking enactment of many of their views is offensive to the rule of law above the minimum threshold. Peter Harris has pointed out one of these. In ex p Wilkinson the Court forced HMRC to enact most of its concessions but JR is a particularly potent example of how the courts are open to all like the Ritz hotel.

Jack Harper

2 Likes
3

I agree that S.3A(b) means, slightly re-worded

‘if it proves to be a chargeable transfer, shall for the purposes of those subsections be taken into account as if, in the year in which it was made, it was made later than any immediately chargeable transfer of value’.

I note that, although IHTM14143 says "It does not matter whether the transfers are potentially exempt or immediately chargeable”, the examples don’t refer to any immediately chargeable transfers.

I’d be inclined to follow the statute, not the ‘guidance’.

Ray Magill