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IHT

Practical Issues
zxc100
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Re: IHT

#434861

Postby zxc100 » August 15th, 2021, 11:11 am

I have been trawling through posts trying to clarify the use of Aim shares in mitigating IHT.

Is the relief on qualifying shares only available on death or could shares be passed on IHT free, after a 2 year holding period? I suspect the answer is no and the gift would merely become a PET.

Thanks for any guidance.

Lootman
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Re: IHT

#434874

Postby Lootman » August 15th, 2021, 11:57 am

zxc100 wrote:Is the relief on qualifying shares only available on death or could shares be passed on IHT free, after a 2 year holding period? I suspect the answer is no and the gift would merely become a PET.

This question came up before on TLF. I cannot reference that topic but I can tell you what I recall about it (and if I am wrong I feel sure someone will correct me).

If you donate a qualifying AIM share to someone then it is important that the donee retains the position for the exemption to continue to apply. If instead the donee sells the position then it was a PET that must be declared if the donor dies within 7 years.

After 7 years or the death, whichever comes sooner, the shares can be sold with no IHT issue.

As stated this would be tricky for an executor however. He might discover the gift and note that it qualifies for IHT relief. But there is no way to independently determine whether or not the donee subsequently sold the position. The executor could try and track down that donee and ask them, but he would be reliant on the honesty of the donee's response.

scrumpyjack
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Re: IHT

#434896

Postby scrumpyjack » August 15th, 2021, 12:57 pm

Lootman wrote:
zxc100 wrote:Is the relief on qualifying shares only available on death or could shares be passed on IHT free, after a 2 year holding period? I suspect the answer is no and the gift would merely become a PET.

This question came up before on TLF. I cannot reference that topic but I can tell you what I recall about it (and if I am wrong I feel sure someone will correct me).

If you donate a qualifying AIM share to someone then it is important that the donee retains the position for the exemption to continue to apply. If instead the donee sells the position then it was a PET that must be declared if the donor dies within 7 years.

After 7 years or the death, whichever comes sooner, the shares can be sold with no IHT issue.

As stated this would be tricky for an executor however. He might discover the gift and note that it qualifies for IHT relief. But there is no way to independently determine whether or not the donee subsequently sold the position. The executor could try and track down that donee and ask them, but he would be reliant on the honesty of the donee's response.


There would be a considerable incentive for the donee to demonstrate that he/she still held the shares as he/she is primarily responsible for any IHT on them! Note that the company must still qualify for the AIM business assets exemption at the date of death.

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Re: IHT

#434898

Postby Lootman » August 15th, 2021, 1:03 pm

scrumpyjack wrote:
Lootman wrote:
zxc100 wrote:Is the relief on qualifying shares only available on death or could shares be passed on IHT free, after a 2 year holding period? I suspect the answer is no and the gift would merely become a PET.

This question came up before on TLF. I cannot reference that topic but I can tell you what I recall about it (and if I am wrong I feel sure someone will correct me).

If you donate a qualifying AIM share to someone then it is important that the donee retains the position for the exemption to continue to apply. If instead the donee sells the position then it was a PET that must be declared if the donor dies within 7 years.

After 7 years or the death, whichever comes sooner, the shares can be sold with no IHT issue.

As stated this would be tricky for an executor however. He might discover the gift and note that it qualifies for IHT relief. But there is no way to independently determine whether or not the donee subsequently sold the position. The executor could try and track down that donee and ask them, but he would be reliant on the honesty of the donee's response.

There would be a considerable incentive for the donee to demonstrate that he/she still held the shares as he/she is primarily responsible for any IHT on them! Note that the company must still qualify for the AIM business assets exemption at the date of death.

I know, but it isn't that simple. For instance suppose I am the donee and you are the executor. You ask for proof that I still own the shares and I show you a printout of my account with the position in there. How do you know I didn't sell the original and then buy the same number back when I got the letter from you? And then sell them a second time as soon as I printed out the statement?

Also by asking me for proof after I already told you that I still have the position rather makes it sound like you think I might be lying. And an executor does not have any special powers to obtain documents for anyone other than the deceased. So I still think this is tricky for an executor.

scrumpyjack
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Re: IHT

#434903

Postby scrumpyjack » August 15th, 2021, 1:42 pm

Yes, quite so. If this situation arose and I really wanted to cover myself as executor, I might pass on the donee's details and claim for AIM business relief to HMRC and leave it to them. I might then retain sufficient funds to pay the IHT, if the business relief claim is rejected by HMRC and the donee doesn't pay up. When I finally get the clearance certificate for the estate from HMRC I would then feel safe to distribute the amount retained.

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Re: IHT

#435223

Postby Eboli » August 16th, 2021, 8:34 pm

xxc100 wrote:
Is the relief on qualifying shares only available on death or could shares be passed on IHT free, after a 2 year holding period? I suspect the answer is no and the gift would merely become a PET.


There are two questions here. (1) Is relief due on the potential exempt transfer made by A who gives unquoted shares to B if B transfers the gifted shares to, say, C, and A subsequently dies within 7 years of the original transfer thus rendering the original gift a chargeable transfer (as a "failed" PET)? The answer is in IHTA 1984 s113A(3)(a), which requires the transferee (B) to have owned the shares "...throughout the period beginning with the date of the chargeable transfer and ending with the death of the transferor...". So the transfer by B to C within 7 years of the gift from A fails this test if A dies within seven years of the original gift (this making the transfer a chargeable transfer). (2) The transfer of value from B to C will, presumably, be a PET by B and does this transfer of value qualify for relief? The question of relief does not arise unless it becomes chargeable because of the death of B within 7 years. Relief is due if B qualifies for the relief (which he may do after 2 years ownership) and C still owned the shares on the death of B.

Lootman's comments are generally correct, though note he says:
If instead the donee sells the position then it was a PET that must be declared if the donor dies within 7 years.

The language is awkward. The gift should always be declared (as a chargeable transfer) as it can never be a PET if the donor dies within 7 years. The question then arises if relief is due on the chargeable transfer.

In addition Lootman says:
As stated this would be tricky for an executor however. He might discover the gift and note that it qualifies for IHT relief. But there is no way to independently determine whether or not the donee subsequently sold the position. The executor could try and track down that donee and ask them, but he would be reliant on the honesty of the donee's response.

But the primary liability to the tax on the chargeable transfer is with the donee! Of course normally the executor will complete the declaration on the chargeable transfer. The danger to the executor is not from additional tax due on the gift but rather if the executor assumes the gift qualifies for relief then it may make subsequent failed PETs that have become chargeable transfer liable to tax, or more of the transfer of value taxable because any assumed nil-rate band has to be re-applied chronologically.

Definitely worth getting any calculations checked!

Eb.
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zxc100
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Re: IHT

#435269

Postby zxc100 » August 17th, 2021, 8:10 am

Guys thank you very much for the in depth response including answering what would have been follow on queries.
Lots of food for thought here.

Zxc

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Re: IHT

#435283

Postby Lootman » August 17th, 2021, 8:57 am

scrumpyjack wrote:There would be a considerable incentive for the donee to demonstrate that he/she still held the shares as he/she is primarily responsible for any IHT on them!

Eboli wrote:the primary liability to the tax on the chargeable transfer is with the donee!

Ah, I thought that IHT is always paid out of the estate if there is enough money in there to cover the liability. And that HMRC only attempts to go after a gift recipient if the estate lacks the funds to pay the tax due.

Trying to go after a gift recipient is not very desirable. He/she might be difficult to find, may live overseas, may be broke and so on.

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Re: IHT

#435472

Postby Eboli » August 17th, 2021, 6:18 pm

Lootman has commented:

I thought that IHT is always paid out of the estate if there is enough money in there to cover the liability. And that HMRC only attempts to go after a gift recipient if the estate lacks the funds to pay the tax due.

Trying to go after a gift recipient is not very desirable. He/she might be difficult to find, may live overseas, may be broke and so on.


The donee is primarily liable. But there is a secondary liability on the personal representatives as made clear by:

https://www.gov.uk/hmrc-internal-manual ... /ihtm30041

Indeed, if the tax (or additional tax) is not paid within 12 months of the date of death HMRC will normally seek payment from the PRs. But HMRC recognise that this is a "sensitive" area. For example see:

https://www.gov.uk/hmrc-internal-manual ... /ihtm30044

Hope this helps.

Eb.

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Re: IHT

#435505

Postby Lootman » August 17th, 2021, 9:25 pm

Eboli wrote:Lootman has commented:
I thought that IHT is always paid out of the estate if there is enough money in there to cover the liability. And that HMRC only attempts to go after a gift recipient if the estate lacks the funds to pay the tax due.

Trying to go after a gift recipient is not very desirable. He/she might be difficult to find, may live overseas, may be broke and so on.

The donee is primarily liable. But there is a secondary liability on the personal representatives as made clear by:

https://www.gov.uk/hmrc-internal-manual ... /ihtm30041

Indeed, if the tax (or additional tax) is not paid within 12 months of the date of death HMRC will normally seek payment from the PRs. But HMRC recognise that this is a "sensitive" area. For example see:

https://www.gov.uk/hmrc-internal-manual ... /ihtm30044

If the PR is potentially responsible then that PR should withhold enough from the estate to cover the liability, as Scrumpyjack suggested earlier, because no PR is going to risk being personally out of pocket.

And if the IHT due is going to exceed the value of the estate then what that means is that the estate is technically insolvent. I suspect that nobody would take on the job of executor if the estate is insolvent and the executor has to rely on the gift recipient coughing up. In fact I would never execute an estate with a negative value - let the creditors deal with it.

Which then leaves HMRC having to figure the whole thing out themselves without any help from a PR. With a good chance that, absent the trigger of probate, they won't even know about the situation.

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Re: IHT

#435548

Postby zxc100 » August 18th, 2021, 12:08 am

[If you donate a qualifying AIM share to someone then it is important that the donee retains the position for the exemption to continue to apply. If instead the donee sells the position then it was a PET that must be declared if the donor dies within 7 years./quote]

So if A donates to B. B must hold the shares until the death of A to obtain relief. Could B sell the share and immediately use the proceeds to invest in another qualifying share without losing relief? I understand that can be done by the original holder without resetting the 2 year qualifying clock.

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Re: IHT

#435775

Postby Eboli » August 18th, 2021, 7:16 pm

1. I would agree with all the further observations of Lootman. I think we are now ad idem

2.zxc100 asks:

..if A donates to B. B must hold the shares until the death of A to obtain relief. Could B sell the share and immediately use the proceeds to invest in another qualifying share without losing relief? I understand that can be done by the original holder without resetting the 2 year qualifying clock.


The answer is in IHTA 1984 s113B:

https://www.legislation.gov.uk/ukpga/19 ... ction/113B

(A) First note you are allowed 3 years to replace property:

https://www.gov.uk/hmrc-internal-manual ... /ihtm25369

(B) Then the three conditions in s 113B(3) are the relevant ones. In other words (a) that B owns the replacement shares either at the transferor's death within 7 years of the original gift or at the donee's earlier death; (b) that ignoring any period lasting up to 3 years during which the replacement share were acquired, the transferor either owned the original gifted shares or the replacement shares throughout the period from the date of the gift to the date of the donor's death or donee's death if earlier, or 7 years, whichever is the shorter period; and (c) that the replacement property would be business property ignoring the 2 year ownership condition of s 106 (so in the extreme the replacement property could be acquired the day before the donor dies).

Eb

zxc100
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Re: IHT

#435853

Postby zxc100 » August 19th, 2021, 8:52 am

Ebola, thank you for the superb reply. I hope others find this information equally valuable.

Once again we have an amazing pooled resource in Lemon Fool fully replacing the old TMF.

Zxc


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