View the related Tax Guidance about Reversionary interest
An introduction to inheritance tax (IHT)
An introduction to inheritance tax (IHT)This guidance note provides a background to IHT and the basic principles.Background to inheritance taxInheritance tax is, essentially, a tax on gifts. This typically arises when a person dies and all the property that they own (their ‘estate’) passes to beneficiaries. An individual may also transfer their assets to others during lifetime. This could be an outright gift of assets to another person or a gift into trust.Assets in trust are held by trustees for the benefit of others, whose entitlement to them is restricted in some way. Special inheritance tax rules apply to trusts to reflect the separation of legal and beneficial ownership.IHT is a tax on the donor ― the person who is transferring the asset(s). It is calculated with reference to their estate. It is not a tax on the beneficiaries, though what the beneficiaries receive may be reduced by the amount of tax. This position contrasts with the law in certain other jurisdictions where ‘death duties’, gift tax or the equivalent are a tax on the people receiving the property and is taxed in accordance with their status or wealth. Clients who receive an inheritance often ask if they have to pay tax on it. Generally, the answer is ‘no’, because any tax due has fallen on those administering the estate or trust, and will have already been paid. However, this may not always be the case, as a lifetime gift may give rise to IHT if the donor dies
Assignment and grant of leases for capital gains tax
Assignment and grant of leases for capital gains taxA lease is the right to use an asset. Where the asset in question is land or buildings, the lease is the right to occupy the land or buildings for a specified period of time, usually in return for a specified rent. Contrast this to a freehold, which is the outright ownership of the property and the land upon which it is built. Freehold and leasehold are separate assets and, as such, a lease can be bought and sold in its own right as well as granted (ie created from a freehold or another leasehold).This guidance note considers the capital gains tax position on:•assignment of a long lease (over 50 years to run)•assignment of a short lease (50 years or fewer to run)•grant of a long lease•grant of a short leaseAssignment is the legal term for disposal of a lease.Disposals of leases may need to be reported and any estimated capital gains tax paid with 60 days of the conveyance of the land. See the Disposals of UK land ― capital gains tax compliance regime guidance note. Whether or not the disposal has already been reported to HMRC, if a self assessment tax return is required, the disposal should be reported on the capital gains summary supplementary pages. Computations of the chargeable gain or allowable loss must be submitted with the tax return.When calculating the capital gain or loss, you should consider the HMRC ‘Capital gains tax
Qualifying interest in possession trusts ― IHT treatment
Qualifying interest in possession trusts ― IHT treatmentTrust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax on the following occasions:•on the death of the beneficiary with the interest in possession•on the death of the beneficiary within seven years after a transfer or lifetime termination of his interest•on the transfer or conversion of the interest to a non-qualifying or discretionary interestProperty in which a QIIP subsists is not relevant property so it is not subject to principal and exit charges during the life of the trust. See the Relevant property guidance note, and other notes in the 'relevant property' sub-topic for details of the relevant property tax regime.Death of the beneficiary with the qualifying interest in possessionWhen the beneficiary with the QIIP dies, the trust property will be valued and counted as part of the deceased estate, and the inheritance tax estate charge will be levied on that property (in addition to any other property that is in his estate). In valuing the trust property, the related property rules will apply. Once the inheritance tax estate charge has been calculated, the trustees of the interest in possession trust will be responsible for paying that part of the tax that relates to the settled property (with the personal representatives being primarily responsible for paying the balance).By contrast, a reversionary interest in settled property subject to a qualifying interest in possession is not included in the estate of the
Overview of the ATED regime
Overview of the ATED regimeATED ― backgroundThe annual tax on enveloped dwellings (ATED) regime was introduced by FA 2013, Part 3 and was one element of a series of anti-avoidance measures that were designed to make it less attractive to hold high-value UK residential property through a corporate structure (or ‘envelope’). The key aspects of ATED are:•the annual charge•entities ‘in charge’ but relievable and the nil return requirement to avoid penalties•ATED-related SDLT•ATED-related CGT for disposals prior to 6 April 2019The ATED regime applies to high-value UK residential property owned on, or acquired after, 1 April 2013, by:•companies•partnerships with at least one company member, or•collective investment schemes (including unit trusts)Together these are referred to in the remainder of this guidance note as ‘non-natural persons’ or ‘NNPs’. The ATED charge applies regardless of where the NNP is established or resident and therefore applies to both UK and non-UK NNPs.Those within the ATED rules are subject to an annual property tax based on the value of the property held, although certain reliefs and exemptions are available. ATED also brings with it additional filing requirements for those within the scope of the provisions, even in cases where no tax charge is actually payable.The ATED rules are complex and this guidance note outlines the main aspects of the regime only.For further detail on the ATED regime, see Simon’s Taxes B6.7 and also HMRC’s annual tax on enveloped dwellings technical guidance.When does ATED apply?Broadly, the ATED regime will
What is a trust?
What is a trust?This guidance note explains the basics of what a trust is and who the parties to a trust, such as the settlor, beneficiary, trustees and remaindermen are. It also explains the types of interest that might arise in a trust and explains some other less frequently encountered terms. It provides background information for accountants and tax advisers to help them understand the key concepts so that they can interpret trust deeds, discuss the merits of trusts with their clients and where necessary instruct lawyers to achieve their aims.This note is necessarily simplified to include the key points for the accountant or tax adviser. It is not targeted at lawyers.What does a trust do?Trusts are a very old concept in English Law dating back many hundreds of years to a device used by men leaving for the Crusades. At its most basic, a trust is where someone (the trustee) holds legal title to property on behalf of someone else (the beneficiary) without being entitled to benefit from it. Therefore the legal and beneficial ownership of an asset can be split by using a trust. Different people can be entitled to different parts of the asset so that the entitlement to income and capital can be different.In fiction, trusts have been used for dramatic purposes with Pride and Prejudice (Jane Austen, 1813 and its many adaptations), Downtown Abbey (TV series, 2010 onwards) and Bleak House (Charles Dickens, 1853 and its many adaptations) all having plots revolving around the
Excluded property and situs of assets
Excluded property and situs of assetsThe concept of excluded propertyInheritance tax (IHT) does not apply to excluded property. Specifically, this means that:•excluded property does not fall into an individual’s chargeable estate for IHT on death•excluded property is not included when calculating any transfer of value made by an individual (including that arising on the termination of a qualifying interest in possession)•excluded property is not ‘relevant property’, and therefore not subject to the periodic 10-year or exit charges on trusts•liabilities relating to excluded property are not deductible for IHT purposesThe domicile connectionThere are a number of categories of excluded property, the most important of which is property situated outside the UK, owned by a non-UK domiciled individual. An individual’s potential UK inheritance tax liability will therefore depend on:•his domicile status (see the Domicile for UK inheritance tax guidance note generally and for details of proposed future changes to the domicile rules for IHT after 5 April 2025)•the location of his propertyIHTA 1984, s 6(1)Situs of assetsProperty is located in the place determined by the rules of common law. These are known as the lex situs rules. The situs of the most common assets are summarised below:LandIs located in the country where it is physically sitedChattelsAre located in the country where they are physically sitedSimple contract debtsAre located in the country where the debtor residesBank accountsAre located at the branch of the bank at which the account is
Disclaiming a gift
Disclaiming a giftThe general law and disclaimersIf a beneficiary of a gift under a Will or intestacy refuses it before acceptance, this amounts to a disclaimer. The property then devolves to the person(s) next entitled according to the terms of the Will or intestacy and so, unlike a variation, it is not possible for the person disclaiming to redirect the property or control its ultimate destination.An effective disclaimer operates as an avoidance of a gift rather than as a disposition which re-directs the subject matter to someone else. Before disclaiming, it is important to find out what the effect will be. As a general rule, if a specific gift or legacy in a Will is disclaimed, it will fall into residue and the beneficiaries of the residuary estate will take the disclaimed gift in the appropriate shares.If a gift of residue is disclaimed and the Will includes a substitutional gift in the event of failure of the gift for any reason, the disclaimed share passes according to those provisions. If there is no effective substitutional gift, the disclaimed share of residue will be treated as a partial intestacy. It follows that if a gift of the whole estate is disclaimed, full intestacy ensues. Care must be taken, however, to be aware of the effect of the Wills Act 1837, s 33. If any child should predecease the testator leaving children of their own, the gift will pass to those children (ie the testator’s grandchildren). This could operate where a
Grants of leases
Grants of leasesThe creation or ‘grant’ of a lease out of an existing lease or freehold is a part disposal of the existing asset. The capital gains position of the person or company making the disposal (the landlord) and the tenant depends on the length of the lease; whether the lease is a long lease, with a term exceeding 50 years, or a short lease, with a term of 50 years or less. The permutations are summarised in the table below and explained in more detail in the rest of this note.This guidance note covers capital gains and income aspects only. SDLT and VAT will also be relevant, for which please refer to the Stamp duty land tax ― basic rules for companies and Land and buildings ― buying and selling ― overview guidance notes respectively.LandlordTenantGrant of long lease out of freehold or long sublease out of long leasePart disposal of the freehold interest or the long lease. The chargeable gain is calculated using the normal part disposal formulaNo trading deduction for premium paidGrant of short lease out of freehold or short sublease out of long leasePart disposal of the freehold or the long lease. The chargeable gain is calculated using a modified part disposal formula. Part of the premium is treated as an income receipt. See the Premiums on the grant or surrender of a lease guidance noteA trading deduction is available where the land subject to the sublease
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