IHT: Special valuation, reliefs and death estate

1
2
Valuation rules: Quoted shares and securities
(a) Valuation of quoted shares and securities
(b) Valuation of unquoted shares and securities
(c) Valuation of unit trusts

3
(a) Valuation of quoted shares and securities
Quoted shares and securities
 The value of quoted shares and securities for IHT purposes is computed as
follows:

Value = Lower of:

(1) ‘Quarter Up’ method
(Using the range of prices quoted on the stock exchange on that day)
= lower price + ¼ × (higher price – lower price).

(2) Average of the highest and lowest recorded bargains.

 Note that these rules are not the same as the valuation rules for CGT

 The range of prices quoted is usually the ‘cum dividend’ values for shares
and ‘cum interest’ values for securities.

 In the examination, always assume shares and securities are quoted

‘cum-dividend’ and ‘cum-interest’ unless the question states otherwise.

4
Meaning of terminology
Quoted cum-dividend or cum-interest
 When shares are quoted ‘cum-dividend’ this means that:

 if the shares are sold, they are sold ‘with the right to the next dividend
payment’

 the shareholder buying the shares will therefore receive the next dividend
payment.

5
 Similarly, if securities are quoted ‘cum-interest’, the person buying the
securities will receive the next interest payment.

Quoted ex-dividend or ex-interest

 When shares are quoted ‘ex-dividend’ this means:

 if the shares are sold in this period, they are sold ‘without the right to the
next dividend payment’

 the shareholder owning the shares on the date they went ‘exdividend’ will
receive the next dividend payment.

 Similarly, if securities are quoted ‘ex-interest’, the owners of the securities on

the date they went ‘ex-interest’ will receive the next interest payment

 Therefore, if an individual dies when shares and securities are quoted ‘ex-
dividend’ or ‘ex-interest’, that individual’s estate will be entitled to the next
dividend or interest payment which, in practice, is usually received a few
weeks later.

 Accrued interest to which the deceased was entitled is included in the death
estate net of basic rate tax (20%). This is because the executors will be
required to account for income tax at the basic rate to HMRC.

6
7
Related property
 ‘Related property’ is a concept unique to IHT.

 The rules exist to reduce the IHT savings which could be obtained by making
transfer piecemeal, partly via an exempt transfer.

 Property is ‘related’ to the donor’s property if it is property of a similar kind

owned by
 the donor’s spouse (or civil partner)
 an exempt body as a result of a gift from that person or their spouse (or
civil partner).

 An exempt body includes a charity, qualifying political party, national body or

housing association.
Property held by the exempt body is deemed to be related:
 for as long as that body owns the asset, and
 or five years after they have disposed of it.

 In the examination, the most common related property is property owned by

the donor’s spouse (or civil partner).

8
9
10
11
12
13
14
Illustration 2: Related property

Value of shares before transfer 275,000

55% / 55% + 25% x 400,000
Value of shares after transfer (0)
0% / 0% + 25% x
______
Transfer of value 275,000
_______
Value of 55% shares under normal IHT rule = 240,000
The higher of two is £275,000 used for IHT computation.

15
16
Fall in value (FIV) relief
 The chargeable amount of a lifetime gift (CLT or PET) is calculated and fixed
at the time of the gift.

 If the gift becomes chargeable on the death of the donor:

 any increase in value between the date of the gift and the date of the
donor’s death is ignored

 if the asset decreases in value between the date of the gift and the date of
the donor’s death, relief is available to reduce the chargeable amount
of this gift on death.

 Therefore, if asset gifted during lifetime is either sold for less than original
value, or market value (MV) at death is lower, then the donee can make a
claim that the death tax is based on the lower value.

 Note that this relief

 applies to both PETs and CLTs

 only affects the calculation of the IHT on that one gift

 has no effect on lifetime IHT already paid

 has no effect on the IHT payable on any subsequent gifts or the

death estate.

 Therefore, the original gross chargeable amount is accumulated and

carried forward to calculate the NRB on subsequent events.

Conditions and operations of the relief

17
Example 1: Fall in value

18
19
20
Example 2: Fall in value H.W
Mark made a gift of some property to his daughter for £230,000 on 1 March 2014. He
then gave a cash gift to his son of £210,000 on 2 October 2017. Mark's only other
lifetime transfer was a gift to a trust on 14 August 2010, which resulted in a gross
chargeable transfer of £105,000.
Mark died on 21 August 2018. At his death, the value of the property given to his
daughter had fallen to £200,000.
Required
Calculate the IHT liabilities on these gifts arising on Mark's death.

21
22
Business property relief (BPR)

Relevant business property

23
Note:
 All businesses above must be trading businesses or the shares held must
be shares in trading companies.

 Related property is included when considering whether control exists.

 BPR is not available if the asset is subject to a binding contract for sale at
the date of transfer.

Minimum period of ownership

 Generally: the donor must have held the property for at least two years
immediately preceding the transfer to qualify for BPR.

Exceptions to the two year rule that still satisfy the ownership period:

 Spouse/civil partner

 where the property was inherited on the death of a spouse/civil partner

 the couple’s combined ownership period is taken into account.

 Replacement property

 where the property replaced other business property

 the donor must have owned relevant property for a combined period of at
least two out of the last five years.

 Successive transfers
 where the property was eligible for BPR when it was acquired, and

 it was acquired as a result of death, or is now chargeable as a result of

death.
Test your understanding: Relevant Business Property

24
Illustration: Minimum period of ownership- Spouse

25
Illustration: Minimum period of ownership- Replacement property

Expected assets

26
Illustration ‘Lucas’: Expected assets

27
Test you understanding ‘Wendy’: Expected assets
On 31 May 2019, Wendy gifted 40,000 shares in STU Ltd, an unquoted trading
company to her niece on the occasion of her marriage. Wendy had owned the
shares since 2005 and on 31 May 2019 the shares were worth £180,000.
On that date, STU Ltd owned assets worth £500,000 which included an
investment property valued at £50,000.
Wendy had made no other lifetime transfers.
Calculate the gross chargeable amount of Wendy’s lifetime gift.

Wendy

28
31 May 2019 Gift to her niece = PET
£
Transfer of value 180,000
Less: BPR
100% × £180,000 × (£450,000/£500,000) (162,000)
ME (1,000)
AE – 2019/20 (3,000)
– 2018/19 b/f (3,000)
–––––––
Gross chargeable amount 11,000
–––––––

Withdrawal of BPR for lifetime transfers

 BPR will be withdrawn when calculating IHT payable on lifetime gifts due to
the death of the donor if:
– the asset is no longer relevant business property, or
– the donee no longer owns the asset.

 If BPR is withdrawn on a CLT:

– the original chargeable amount must be used for NRB calculations (e.g. if
BPR at 100% was available on the original transfer, the chargeable
amount would be £0 when determining the available NRB).

Agricultural property relief

29
Relevant agricultural property

30
31
Example: APR Basic

Interaction of APR with BPR

 APR is applied before BPR, but only applies to the agricultural value of farm
land and buildings.

 Any remaining value not covered by APR may still be subject to BPR:

 if farmed by the owner and the BPR conditions are met

 not if farmed by a tenant (as this would be an investment).

Test your understanding: APR with BPR interaction

Zac plans to gift his farming business and £20,000 cash to his grandson on the
occasion of his marriage in the tax year 2019/20. He has made no other lifetime
gifts in the preceding seven years.

32
Zac lives on the farm and has owned and worked the business for the last
seventeen years.
A surveyor has recently valued Zac’s farm and its land as follows:
£
Agricultural value 600,000
Development value 400,000
––––––––
Market value of farm land and buildings 1,000,000
Animals and inventory 150,000
Plant and machinery and motor vehicles 80,000
––––––––
Market value of farming business
1,230,000
––––––––
Calculate the chargeable amount of Zac’s gift to his grandson.

Zac
£
Transfer of value – Farming business 1,230,000
– Cash 20,000
––––––––
1,250,000
Less: APR on agricultural value
(£600,000 × 100%) (600,000)
BPR on remaining value
(£400,000 + £150,000 + £80,000) × 100% (630,000)

33
ME (grandparent to grandchild) (2,500)
AE – 2019/20 (3,000)
– 2018/19 b/f (3,000)
––––––––
Gross chargeable amount 11,500
––––––––
Note: Items such as the development value of the farm, the farm animals,
inventory and farming equipment do not qualify for APR.
However, as it is Zac’s unincorporated business and he has owned and worked
the farm for more than 2 years, BPR is available.
If the farm was owned by Zac but let to tenants who worked the farm, APR would
be available on the agricultural value but BPR would not be available on the
remainder.

Shares in a farming company

APR is available in respect of shares in a farming company provided:
 the individual has control of the company

 the minimum period of ownership condition is satisfied.

Note that:
 to determine control, related property holdings must be considered.

 APR is only given against the agricultural value that can be attributed to the
shares. BPR may be due on some or all of the remainder.

 APR will be restricted where the farming company holds excepted assets in
the same way as for BPR.

34
Test your understanding: APR & Shares in farming company
Since 2006, John has owned a 75% shareholding in Arable Ltd, an unquoted
trading company which owns farm land.
On 31 October 2019 John gifted the shares to his daughter when they were
worth £375,000 and the accounts of Arable Ltd show:
£
Farm land 350,000
Other assets 150,000
–––––––
500,000
–––––––
The farm land has been let to tenants for the previous nine years.
The agricultural value of the farm land was £300,000. The other assets of
£150,000 were all used in Arable Ltd.’s trade.
Calculate the gross chargeable amount of the gift to John’s daughter.

Solution
APR is available as:
 Arable Ltd.’s farm land has been let out for the previous nine years
 John has a controlling shareholding in the company.
In addition, as the shareholding is in an unquoted company, BPR is available on
any amount that does not qualify for APR, subject to the relevant BPR conditions
being satisfied.
£
Transfer of value – shares in farming company 375,000
Less: APR on agricultural value (Note)

35
(£300,000/£500,000) × £375,000 × 100% (225,000)
BPR on Arable Ltd.'s other assets
(£150,000/£500,000) × £375,000 × 100% (112,500)
Less: AE – 2019/20 (3,000)
– 2018/19 b/f (3,000)
–––––––
Gross chargeable amount 31,500
–––––––
Note:
 APR is only available on the agricultural value of the farm land that can be
attributed to the shares transferred.

 BPR is available on the value that can be attributed to the business assets in
Arable Ltd (i.e. the 'other assets').

 BPR is not available on the development value of the farm land attributed to
the shares as the farm is tenanted (i.e. not owned and farmed by Arable Ltd).

Withdrawal of APR for lifetime transfers

 In the same way as BPR, APR will be withdrawn when calculating IHT
payable on lifetime gifts due to the death of the donor if:

 the asset is no longer relevant agricultural property, or

 the donee no longer owns the asset.

Exam kit questions on this area:

Section A questions
• Una
Section B questions

36
• Eric • Sabrina and Adam Juanita a Fitzgerald & Morrison b
Pro forma death estate computation

£ £
Freehold property ** Note 1 X
Less: Mortgage (not endowment mortgage) Note 2 (X)
––––
X
Foreign property Note 3 X
Less: Expenses (max 5% of value) (X)
––––
X
Business owned by sole trader/partnership * X
Farm * X
Stocks and shares (including ISAs)* ** X
Government securities X
Insurance policy proceeds Note 4 X
Death in service policy X
Leasehold interest X
Motor cars X
Personal chattels (no £6,000 exemption)** X
Debts due to the deceased X
Interest and rent due to the deceased X
Cash at bank and on deposit (including ISAs) Note 5 X
––––
X
Less:
Debts due by the deceased (X)
Outstanding taxes (e.g. IT, CGT due) (X)
Funeral expenses (X)
––––
(X)
Less: Exempt legacies
(to spouses/civil partners, charities or political parties) (X)
––––
Net free estate X
Add: Gifts with reservation (GWR) Note 8 X
––––
Gross chargeable estate X

37
 ––––
* Amounts may be reduced by BPR/APR ** Related property apply?

Calculation of IHT on gross chargeable estate

£ £
Gross chargeable estate (above) X
RNRB available (X)
NRB at date of death X
Less: GCTs in seven years before death (X)
–––
NRB available (X)
–––
Taxable estate X
–––
IHT payable (40%/36%) Note 6 X
Less: Quick succession relief (QSR) Note 7
(X)
Less: Double tax relief (DTR) (X)
–––
IHT payable X
–––
Due date: Earlier of
 six months after end of month of death
 on delivery of estate accounts to HMRC

Tips
Death estate
Subject to any particular valuation rules, the death estate comprises all assets at
open market value (OMV) at the date of death (= probate value)

38
Death estate
Subject to any particular valuation rules, the death estate comprises all assets at
open market value (OMV) at the date of death (= probate value)

Note 1: Land and freehold property situated in the UK

 When land and property is held by two or more individuals, they own the
property as either ‘joint tenants’ or ‘tenants in common’.

 On the death of a tenant their share is inherited as follows:

 Value = proportion of the value of the whole property (e.g. half if two tenants)

This may be reduced for tenants in common (assume 10% reduction for the

39
 exam). For tenants in common the value is negotiated and agreed with
HMRC.

 Deduct interest only and/or repayment mortgages, but not an endowment

mortgage.

Illustration: Tenant in common

A brother and a sister jointly own a property as tenants in common worth
£500,000.

Calculate the value of the brother and sister’s share in the property for IHT
purposes if they were to consider making a transfer of their share in the
property.

Solution
The value of half the property would be on a ‘stand-alone’ basis. This is the OMV
of the half share of the property on the open market which is unlikely to be 50%
of the whole value.

However, who would buy half a house?

The Capital Taxes Division of HMRC accepts that a ‘tenanted deduction’ of
between 5% to 15% from the OMV is appropriate for IHT valuation purposes. For
exam purposes, always assume a deduction of 10%.

£
Half the value of the property (£500,000 × ½) 250,000
Less: 10% deduction (25,000)
–––––––
Value of the half share for IHT purposes 225,000
–––––––

Note 2: Mortgages

 Endowment mortgages are not deductible from the property value in the
death estate computation. This is because the endowment element of the
40
 policy should cover the repayment of the mortgage on the owner's death and
therefore there is no mortgage outstanding.

 However, repayment and interest-only mortgages are still outstanding at

the owner's death and are therefore deductible from the property value.

Note 3: Valuation of overseas assets / foreign property

 Convert into sterling at the exchange rate at the date of death which gives
the lowest sterling valuation.

 When valuing overseas property in the death estate, can deduct additional
expenses incurred in:
 administration relating to the overseas property, or

 expenses relating to the sale of the overseas property

Maximum = 5% of the market value of the property.

 If overseas tax has been paid, double tax relief may be due.

Note 4: Life assurance policies

 If the policy relates to the individual’s own life:

 include the proceeds received

 If the policy is held in trust for a named beneficiary:

 do not include it in death estate (no IHT will be due on the proceeds).

Note 5: Transfer of ISA allowance on death

41
Note 6: Reduced rate of IHT for substantial legacies to charity

 A reduced death rate of 36% applies to estates in which 10% or more of

the 'baseline amount' is left to a qualifying charity.

 Charitable legacies are exempt from IHT.

 In addition:
 a reduced rate of 36% applies to the death estate
 if at least 10% of the ‘baseline amount’ is left to a qualifying charity.

 The ‘baseline amount’ is the taxable estate:

 after deducting exemptions, reliefs and the available ‘normal’ nil rate
band,
but
42
  before deducting the RNRB and charitable legacies.

 Tax the taxable estate at the following rate:

 If charitable legacies ≥ 10% rule: 36%
 If charitable legacies < 10% rule: 40%.

Example : Reduced rate of IHT for substantial legacies to charity

43
44
TYU: Reduced rate of IHT for substantial legacies to charity

Han died on 1 May 2019 leaving an estate consisting of:

Family home £420,000

Quoted shares £145,000
Cash £67,000

Han owed tax of £3,200 at his death. In his will he left the shares to his wife, the
family home to his children and £67,000 to Oxfam, a UK registered charity.

Han had made one lifetime gift to his son of £310,000 on 10 April 2016.

Calculate the amount of IHT due as a result of Han’s death.

Han
Death estate – 1 May 2019
£ £
Family home 420,000
Quoted shares 145,000
Cash 67,000
–––––––
632,000
Less: Debt due at death (3,200)
–––––––
628,800
Less: Exempt legacies
Spouse (145,000)
Charity (67,000)
–––––––
Gross chargeable estate 416,800
–––––––

45
IHT on chargeable estate:
Gross chargeable estate 416,800
Less: RNRB (125,000)
NRB @ date of death – 2019/20 325,000
Less: GCTs < 7 years before death
(1.5.2012 to 1.5.2019) (W1) (304,000)
–––––––
NRB available (21,000)
–––––––
Taxable amount 270,800
–––––––
IHT due on Han’s death (£270,800 × 36% (W2)) 97,488
–––––––
Workings:

(W1) Lifetime gift to son

£
Transfer of value 310,000
Less: AEs – 2016/17 and 2015/16 b/f (6,000)
–––––––
PET 304,000
–––––––
This gift is a PET and falls below the value of the NRB at death. No IHT is due on
this gift but it reduces the NRB to set against the death estate.

(W2) Rate of tax to use for the death estate

£
Taxable amount 270,800
Add back: Charitable legacy 67,000
RNRB 125,000
–––––––
Baseline amount 462,800
–––––––
Apply 10% test (£462,800 × 10%) 46,280
–––––––
As the charity legacy of £67,000 is more than £46,280, the reduced rate of 36%
can be applied to calculate the tax on the estate.

46
Reliefs available against the IHT liability on the death estate
There are two tax credit reliefs that reduce the IHT liability on the death estate
as follows:
£
IHT on chargeable estate X
Less: Quick succession relief (QSR) Note 7 (X)
Double tax relief (DTR) (X)
–––
UK inheritance tax payable X
–––

Quick succession relief

 Basic idea
QSR is given if an asset/estate is taxed twice in a period of five years.

 QSR reduces the IHT payable on the death estate if:

 the deceased was given/inherited an asset

 in the five years before death, and
 there was a charge to IHT on the gift/inheritance.

 QSR still applies even if the asset is no longer held at date of death by the
deceased.

 The appropriate percentages are as follows:

47
 No of years between the two deaths Appropriate percentage
More than Not more than
0 1 100%
1 2 80%
2 3 60%
3 4 40%
4 5 20%
These percentages are not given in the exam.
The closer the two deaths, the greater the percentage

 Amount of tax credit / QSR

QSR = (IHT on first death) × appropriate %

IHT on first death =

Alternative formula

Amount of tax credit / QSR =

48
Example: QSR

49
Test your understanding: QSR
Daisy died on 31 July 2019 leaving an estate of £340,000. She had made no
lifetime gifts and her estate did not include residential property.

In June 2015, Daisy had been left £28,000 from her brother’s estate. Inheritance
tax of £75,000 was paid on a total chargeable estate of £450,000 as a
consequence of her brother’s death.

Calculate the IHT payable on Daisy’s death.

Daisy
31 July 2019
£
Gross chargeable estate value 340,000
Less: NRB available (325,000)
–––––––
Taxable amount 15,000
–––––––
IHT on death (£15,000 × 40%) 6,000
Less: QSR (W) (933)
–––––––
IHT payable on Daisy’s estate 5,067
–––––––

Working
QSR = (IHT on first death) × appropriate %
IHT on first death =

QSR = (£75,000/£450,000) × £28,000 × 20% (Note) = £933

Note: June 2015 to July 2019 = 4 – 5 years.

50
Example: QSR Basic
Mr K transferred shares to Mr L on his death on 4 March 2015. The chargeable
(ie gross) value of the transfer was £48,531 including IHT of £8,420 paid by Mr
K's estate.

On 8 May 2019 Mr L died, leaving a chargeable estate valued at £330,000. He

had made no lifetime transfers.

Required
Show the tax liability on Mr L's estate.

Exam focus
 ERIC

51
Summary of death estate

52