BPR impact on an exit after a principal charge

I am dealing with a trust that had a 10 year anniversary in 2016. At that time the value of the trust was c.£900k with no APR/BPR relief - so IHT was payable.

The trust is now being wound up with a similar value - however c.£750k is now BPR qualifying, with the remaining £150k not.

I am in two minds as to how the exit calculation works -at s69. Do I go back and amend the value of the trust for calculating the % - so that there will be no exit charge on the £150k or does the percentage that was calculated without the BPR remain the same and the £750k exit is reduced to £0 and IHT is paid on the £150k

Many thanks

My understanding is that once the trust has passed its first ten-year anniversary, inheritance tax exit charges are always based on the effective rate of tax used for the previous ten-year anniversary charge.

However, the amount subject to the exit charge may be reduced by business relief if the conditions for relief are satisfied. Therefore, the amount subject to the IHT exit charge in this example would be £150K if the conditions for BR were satisfied.

Kim Jarvis

Thanks for this Kim - i thought that was the case but just couldn’t work it out for certain!

There are apparent inconsistencies in the legislation and HMRC practice as regards APR and BPR in RPT chargeable events.

1 s2(3) IHTA extends the meaning of chargeable transfers to RPT chargeable events including references to the values transferred by them (TOVs). So arguably exit charges (and the principal charge) are made chargeable to tax on the values transferred by them only by virtue of s2(3).

2 APR and BPR are given by reducing the value transferred by a TOV: ss104(1) and 116(1).

3 s65 purports to impose a charge to tax (as does s64). Is this independent of s2(3)? This is important because these two sections use the word “value” but not the words “value transferred” in s2(3). Whether or not that is so, my premise is that where the word “value” appears in these sections, and in the rate of tax sections 66,68,and 69, the word has the same meaning unless it is clearly differentiated, which it is not.

4 In IHTM42114 HMRC express the view that APR/BPR DO NOT not apply to the “value” charged by a chargeable event before the first 10 year anniversary. In 04097 they say these reliefs DO apply to the 10 year anniversary charge. In 42111 they say the reliefs DO apply to an exit charge. I cannot find any justification for this difference within the single s65 but it is of long-standing and I am not aware of its ever being challenged. Exit charges are calculated on a “loss to trust” basis but this would not itself seem to import s2(3) and thus the TOV concept and the two reliefs. However s68 deems a chargeable transfer to occur before the first 10 year anniversary whereas s69 does not. So s68 may apply the reliefs but arguably s69 not! Is this difference to be given no meaning? On the contrary it seems to treat a s65 charge in the first 10 as if it were a chargeable transfer so a TOV so eligible for relief.

5 There are no cross-references to the other set of provisions in the RPT part of IHTA or the APR and BPR parts.

So the rate for an exit charge between 10 year anniversaries can indeed be calculated by reference to the last 10 year charge which took account of either or both reliefs. And the property charged can attract either or both so the “relieved” rate applies either to any value as reduced by reliefs and to any non-qualifying property. Correspondingly, no relief may have been due previously so the rate does not reflect that but the property charged to the “unrelieved” rate at exit can itself be relieved.

It would be difficult for HMRC to resile from their favourable interpretation of “value” as being after reliefs but their different interpretations of the word in s 68, which even deems a chargeable transfer to be made so arguably importing s2(3), and s69 which do not seem justifiable. It will be an uphill task to convince HMRC but perhaps not the FTT that HMRC are wrong about the effect of s65 combined with s69.

Jack Harper

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