Conditional Exemption

A painting was passed from A to B on A’s death and the conditional exemption was clearly given on A’s death when the picture passed to B (their sister who is now deceased).

My question is if the exemption is not renewed now on B’s death, and therefore, tax is payable with reference to the death of A, who is responsible for the IHT arising – is it B’s executors, or A’s executors?

The former seems more likely, not least because there will not be any assets left in the hands of the executors of A’s estate with which to pay IHT on an asset valued at some £2m (death was many years ago). However, there is no IHT arising on the value of the picture on the transfer by B to their beneficiary, as it is a charity and charity exemption will apply.

There are two different things going on here. First, the usual IHT charge on B’s death under s4 IHTA. Secondly, the separate self-standing chargeable event under s32(3) as regards the earlier death of A (however long ago). The peculiarities of this charge, which is in essence a deferral of the s4 charge on A’s death, particularly the future consequences on the death of B or a prior lifetime sale or gift by B should have been clearly explained to B at A’s death as part of the process of claiming conditional exemption and B was presumably the claimant under s30(1)(b). B should also have been warned of the chargeable event that would arise on a breach of undertaking

1 The s4 charge is easier to analyse. As the property passes to a charity it will be IHT exempt under s23. Not only is it not necessary to claim conditional exemption it is not permitted: s30(4). The charity is free to deal with it within the bounds of charitable exemptions for disposals and of course is immortal.

2 The self-standing charge is more complex. It can be avoided by another s30 claim: s32(5) and (5AA). Otherwise a special tax charge arises. The person liable is defined by s207(1) as the person who, if the property were sold immediately after B’s death. to receive the sale proceeds whether or not beneficially. That is almost certainly B’s PRS. It may well be that they can only meet the liability by selling the property. A sale to a simple charity cannot be subject to conditional exemption. A sale to a Sch 3 body can: s30(4). (Other overrides of the chargeable event are acceptance in lieu of tax or gifts to the nation:s30(4) and (4A).

The rate of tax is calculated by adding the the market value of the property at B’s death to the estate of A at A’s death as the top slice of it and then charging that additional value at the rates then in force: s33(1).

IHTM deals with these issues only in bare outline but the vade mecum is the Guidance on Capital Heritage and the National Heritage of 9 May 2022–acceptance-of-property-in-lieu.

Jack Harper