H died leaving a NRB Discretionary Trust in his Will, with residue to spouse on life interest trusts. He owned a half share in the family home.
W died shortly after but crucially before H’s estate was administered. W owned the other half of the family home.
Therefore at W’s death, half the home was owned by her and half by her husband’s estate. We therefore believe a 10% discount against the value of the home should apply, as the home was not owned by H and W, but rather by W and H’s estate, and therefore the related property rules should not apply.
A person’s estate (real and personal) devolves automatically on the executors on death. Accordingly, both legal and equitable title is vested in the executors.
The related property rules require that the property of W is related to that of W’s spouse (H) only if the property is comprised in the estate of H which in turn requires that H has beneficial entitlement at the relevant time. On H’s death, his estate vested in his executors.
The related property rules would not therefore be in point on W’s death.
Presumably, on W’s death, her marriage to H dissolves and thus W did not have a spouse on her death.
Thank you Malcolm. That’s the position we have adopted, but HMRC are not accepting the same.
They are stating that Section 91 states that where a person is entitled to an IIP in the residue of an unadministered estate they shall be treated as the beneficial owner of the estate from the death of the deceased person. This seems illogical but is supported by their manual at
However, as part of the half share was appointed to the nil rate band trust, albeit after wife’s death, surely this would mean that the related property rules should not apply?
To cut a long story short, HMRC have rejected the discount on the basis that H’s half share in the property was not appropriated to his NRB Trust at W’s death. When this was later appropriated and then part appointed to a beneficiary under s144, HMRC advised that s144 IHTA is a deeming provision only and therefore no discount applies. Our argument is s144 is read back and therefore at W’s death, the beneficiary and W owned the property, allowing for a discount.
On W’s death she had an IPDI in half the house and owned the other half, so the whole of the house is part of her estate for iht purposes, and all of it is taxable on her death, notwithstanding that H’s estate was then unadministered. This is because of s.91 IHTA which deems the IPDI to arise and apply to the whole of the residue, charged with the payment of the NRB Trust, even though it was not then ascertained.
S142 is also a deeming provision and hmrc are known to have accepted the discount applies when a DOV diverts a share of a house of the first spouse to children, so that the discount applies on the second death.
Regardless of that, if this is their only argument you have them over a barrel, as s144 clearly states that if the section applies, which it does to the appointment, “this Act shall have effect as if the will had provided that on the testator’s death the property should be held as it is held after the event.”
There is no limitation to its effect in relation to the Act, so all provisions in the Act apply as if the share appointed had been so directed to be held on H’s death-which means the discount must apply on W’s death, as her IPDI would have excluded the share appointed.
This has nothing to do with the related property provisions
It appears that HMRC’s issue is not with respect to the related property rules.
I’m not sure I can agree with their view as to the implication of s144 IHTA 1984 being a deeming provision. Where the other 50% (or some part of it) of the family home was appropriated to the NRBDT, albeit post W’s death, and subsequently appropriated to a beneficiary “B” it is clear that under s144 H is treated as having left the 50% (or part) to B.
What is also clear is that s144(2) provides that “… this Act shall have effect as if the will had provided that on the testator’s death (H) the property should be held as it is held after the event [ie held by B]”.
Therefore as at W’s death both W and B held their respective 50%s and a discount should therefore be available.
I typed this prior to Simon’s comments with which I also agree.
"We note your argument that S.144 takes effect so treat the share of the property appointed to the deceased’s son (6.4%) as taking effect not only on the estate of his late father’s but extending this to treat the 6.4% as owned by the son for all purposes from that date thereby affecting the above estate.
S.144 makes it clear that this section only applies for the specific purposes of the IHTA and only where there is a proportionate charge. The first part of the section advises that there will be no Inheritance Tax payable on the proportionate charge event on the making of the appointment but the second section, quoted in your email, states that, in every case where subsection 2(a) applies in relation to the event, the Inheritance Tax Act shall treat the property as passing in terms of the deceased’s Will. The first section restricts the application of S.144 to an event where there would be a proportionate charge and the second section then treats the property as passing under the testator’s Will but only where there is a proportionate charge event and not for any other purpose.
There is nothing in the terms of S.144 which extends the application to any other event and so it cannot be used to transfer the beneficial interest in the property to the deceased’s son in real terms or treat him as owning a share of the property from his father’s death. He is only treated as owning this share for the purposes of calculating the Inheritance Tax on his late father’s estate. The actual transfer of the share in the property can only be completed in writing and this was done by Deed of Appointment that was executed after his mother’s death. There are no deeming provisions which take effect on her death as the appointment did not relate to her estate."
"Where this subsection applies by virtue of an event within paragraph (a) of subsection (1) above (ie an appointment that would normally trigger a proportionate charge) tax shall not be charged under the provision in question on that event (so no proportionate charge);"
If this was to be limited for IHT purposes to the calculation of IHT on the exit charge the subsection could have finished there-ie no proportionate charge. However, instead the subsection continues:
" and in every case in which this subsection applies in relation to an event, this Act shall have effect as if the will had provided that on the testator’s death the property should be held as it is held after the event."
This part does not say the Act only applies for the purposes of tax payable on the event as suggested by HMRC. It refers to the event as a means of identifying the circumstances in which this part of the subsection will apply, but then says “this Act shall have effect as if the will had provided that on the testator’s death the property should be held as it is held after the event” without any restriction on how the Act applies. If it was to be so restricted, it would have said “this Act shall have effect in relation to the tax charge on the event as if the will…”.
Therefore, from the date of death of H, the son is treated for the purposes of the IHTA as owning a share of the property, so the discount applies on the death of W.
I have read and re-read s144. I think I understand where HMRC are attempting to come from but struggle, given the wording of s144(2), to agree with their conclusion.
The appointment out of the NRBDT (ie the event giving rise to a potential exit charge; s144(1)(a)) is the catalyst which brings in s144(2) providing for no exit charge to arise. Once such an event occurs, then not only does no exit charge arise but the provisions of IHTA 1984 are then to apply as if the will had provided for the property appointed to be held as after the appointment.
There are in effect two separate parts to s144(2).
I see no restrictions as to which bits of IHTA 1984 only, are to apply in view of the wording “…this Act shall have effect…”.