This is a transcript of a Stubb Legal CPD training course.

What follows is the full text of the script used to produce the audio recording. This script has been read verbatim, and lasts approximately one hour. Once you have listened to the audio recording, you should be able to answer the Multiple Choice Test at the end of this page.

This audio recording will concentrate on Inheritance Tax.
Quotations from judgments of the House of Lords are the copyright of the United Kingdom Parliament and from other judgments are Crown copyright. Quotations from statutory legislation are Crown copyright.

PART ONE - LIABILITY & DOMICILE

1 The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011 {SI 2011/170}

DOMICILE
Inheritance tax is charged on the diminution in value of an estate belonging to a UK taxpayer. Inheritance tax depends upon being domiciled in the UK. Domicile is a general law concept; it refers to the country which is the permanent home of a person. A person can only have one domicile at any given time. There are a range of factors that can affect domicile, and domicile can change during the testator's lifetime. Domicile status is usually acquired from the testator's father. A new domicile can be acquired when a testator settles in a new country, with the intention of permanently living there.
Questions of a deceased’s domicile are also important in determining liability of an estate to the possibility of a claim being made against the estate under the Inheritance (Provision for Family and Dependants) Act 1975.
In the recent case of Allen v HM Revenue & Customs {SpC 481}, domicile was in issue. The deceased had been born in England in 1922. Between 1953 and 1982, she and her husband had lived abroad as a result of his job for an oil company. They did not own a house until 1982 when her husband retired and they bought a property in Spain. They visited the UK infrequently. In 1996 her husband died unexpectedly. The deceased brought her husband’s ashes back to the UK to be interred in his parent’s grave and she stayed with her half-sister and brother-in-law. She described herself as a visitor and played no part in the running of the house. She retained her house in Spain in a constant state of readiness for her return. She kept her principal investments and bank accounts outside the UK. Her health deteriorated during 1997 due to Parkinson's disease and it was clear that she could not live alone. Her half-sister and brother-in-law acted as carers. She visited Spain whenever she could and, when she did so, ran the house. However, her visits ceased after 1999 owing to her deteriorating condition. In June 2001, to relieve the strain on her half-sister and brother-in-law, the deceased bought the adjoining house, intending to have it converted to her needs. However, she was admitted to hospital in February 2002 and died in August 2002.
It was agreed that she had acquired a domicile of choice in Spain. The question was whether she had abandoned it and acquired a new domicile in England and Wales. The burden of proof was on the Inland Revenue. It was necessary to prove that the deceased had both ceased to reside in Spain and ceased to intend to reside there permanently or indefinitely.
The special commissioner found that the Revenue had not proved this. Significant points were: the deceased had lived the whole of her married life outside the UK; she had retained a residence in Spain until her death, although she could not be said to reside there once her visits ceased; however, she retained the intention to return to Spain if possible and her actions preserved the possibility that she might be able to return there with her half-sister and brother-in-law as carers.
In the recent case of Dellar v Zivy {[2007] EWHC 2266 (Ch)}, the High Court considered the question of domicile. The testator was a French citizen who moved to London in the late 1970s. He died in 2001, unmarried and childless. By his will, the testator left the residue of his estate to his sister, provided - as occurred - she survived him for 56 days; and subject to that, his shares in a French company, were to pass to various nephews and nieces. The testator's sister survived the deceased for 56 days. However, the nieces brought proceedings in France, apparently on the back of advice that the effect of the will under French law was that the shares in the French company would pass to them. The French court held it had jurisdiction, but the testator's sister and the executor, appealed that decision. The executor then instituted proceedings in the High Court for a declaration that the shares passed to the testator's sister, and applied for summary judgment on the claim. The nieces cross-applied to strike out or stay the executor's claim on forum non conveniens grounds. The French Court of Appeal stayed the French proceedings until the English claim had been heard.
The main issue for the English court was whether English or French law should apply to the interpretation of the will. The High Court rejected the nieces's contention that a will containing a disposition of movable property should be interpreted according to the law of the testator's domicile at death. While that may be correct where questions of material or essential validity of such wills are concerned, the clear rule is that "a will is to be interpreted in accordance with the law intended by the testator. In the absence of indications to the contrary, this is presumed to be the law of his domicile at the time when the will is made". Here, it was absolutely clear that, whatever the testator's domicile at the time the will was made, he intended it to be interpreted in accordance with English law. Among other things, the will was made in England by English solicitors, written in English and expressly declared the testator's domicile to be England; it appointed an English solicitor as executor and directed that English solicitors be consulted in all matters concerning the estate's administration; and it created a trust for sale - a mechanism not known to French law. It followed that the shares passed to the testator's sister. Moreover, although the French court was first seised, England was clearly the most appropriate forum: the will, draftsman and relevant law were all English; the fact that the nieces were French, and that the shares were in a French company, was of less importance.

FOREIGN PROPERTY
Generally, if the testator was domiciled in the UK, inheritance tax applies to his assets wherever they are situated. Although that is the general rule, in some cases HMRC will charge inheritance tax on a testator who was domiciled abroad. However, this depends upon whether there is a double taxation convention in force.
In Kempe v IRC {SpC 424, 22 July 2004}, the testator died domiciled in England but had worked for and was a member of the Time Warner insurance scheme in the US. Under that scheme, the testator had insured his life and had designated as beneficiaries his two sisters. The scheme stipulated that they would receive the sum assured when he died. For US purposes, the sum assured was not taxable. However, the Inland Revenue assessed the sum to tax as part of the testator's estate on the basis, amongst others, that the terms of the policy, which were much more flexible than is usual under a UK policy, effectively conferred on the testator a general power of appointment under section 5 of the Inheritance Tax Act 1984. The special commissioner found the sum taxable as, regardless of the position in the US, there was no general exemption from tax for death benefits in the UK. Where such benefits are discretionary in nature and nominated to the deceased's dependants outside his estate, they were not charged to inheritance tax. In this case however, the designated beneficiaries were entitled as of right to the payment. The testator did have a general power to enable him to dispose of the sum assured, meaning that he was beneficially entitled to it so that the sum assured farmed part of his estate for inheritance tax purposes.
Testators who were domiciled abroad are not taxed on excluded property. The best example of excluded property is government securities. In addition, British government securities held by persons who are not ordinarily resident in the UK will be free of inheritance tax. This is an extremely generous exemption which may not be widely appreciated by those who have taken up residence abroad, but perhaps without the commitment necessary to have established a foreign domicile.

FOREIGN SETTLEMENTS
The new rules introduced in the Finance Act 2006 have an effect on the meaning of excluded property. Section 48 of the Inheritance Tax Act 1984 provides that settled property is excluded property and outside the scope of inheritance tax if it satisfies two tests: firstly, the settlor was not domiciled in the UK at the time the settlement was made; and secondly, the property comprised in the settlement is situated outside the UK.
Section 82 of the Inheritance Tax Act 1984 had a bearing on the matter as far as the discretionary trust regime is concerned. Where the settlor or their spouse had an interest in possession immediately before the discretionary trust arose, an additional condition had to be satisfied. The settled property was only regarded as excluded property if the life tenant was not UK domiciled when the interest in possession came to an end. This was a serious restriction, interfering with the idea that the domicile of the settlor at the time the settlement was made was the conclusive condition. However, it only applied in respect of the discretionary trust regime and not where the interests in possession continued.
Under the post 22 March 2006 rules, section 82 no longer has much application because the termination of an interest in possession has little significance for new settlements; the settled property will already be in the discretionary trust regime irrespective of the existence of the interest in possession of the settlor or his spouse.
For pre 22 March 2006 trusts the situation is almost unchanged. A foreign domiciled life tenant dies, their widowed spouse becomes entitled to an interest in possession and on the spouse's death - or on the termination of the spouse's interest in possession - the excluded property status will depend upon the spouse's domicile at the time - and not the domicile of the original settlor at the time the settlement was made.
However, a problem can arise under the new regime because of the changed treatment of interest in possession trusts. Let us consider the position of a foreign domiciled husband with an interest in possession, followed by an interest in possession for his UK domiciled wife, followed by an interest in possession for their child. This was fine before 2006, because the settled property was not within the discretionary trust regime and section 82 had no application. The settled property remained excluded property throughout, even during the interest in possession of the child. But now it does matter, because on the death of the UK domiciled wife, the assets go into the discretionary trust regime - so whether or not those assets are excluded property will depend upon the domicile of the spouse at the time. This will also be important if the settlor has an interest in possession which terminates in favour of anybody after such time that their domicile has changed - perhaps by reason of becoming deemed domiciled in the UK under the 17-year rule in section 267 of the Inheritance Tax Act 1984.
Solicitors often advise private clients to set up an offshore trust, but this advice is fraught with complications. It may be correct to advise from a tax point of view that the trustees should be based in Bermuda, but the lawyer should also be aware of section 218 of the Inheritance Tax Act 1984. Section 218 applies to any person who in the course of his trade or profession has been concerned with the making of a settlement and knows that the settlor was domiciled in the UK and that the trustees are not resident in the UK. Such a person is required to make a return to the Inland Revenue giving details of the settlor and the trustees. This obligation has been around for more than 20 years. The adviser might only advise on the matter generally leaving the client to take whatever action he wishes in the light of his advice, in which case he cannot sensibly be brought within the scope of the section. He may have been concerned with the making of the settlement but this presupposes that the settlement had been established. The adviser may not know what the client eventually decided to do. The adviser may not know the identity of the trustees or indeed any relevant details of the settlor and these obligations can only apply to those who are able to provide the information under the section. In many cases the adviser will not know where the settlor is domiciled. The duty to notify only arises if he knows or has reason to believe that the settlor is domiciled in the UK.
There are also complications where a UK trust is moved offshore. When a UK resident settlement ceases to be resident in the UK, section 80 of the Taxation of Chargeable Gains Act 1992 applies to bring all unrealised gains in the trust into charge to capital gains tax by the normal mechanism of a deemed disposal and reacquisition of all the assets.
As with other taxes, there is now a duty to report to the Revenue any tax avoidance schemes. The relevant statutory instrument is the The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011 {SI 2011/170}. These Regulations prescribe arrangements which enable, or might be expected to enable, a person to obtain an advantage in relation to Inheritance Tax and which a promoter is required to notify to Her Majesty’s Revenue and Customs under Part 7 of the Finance Act 2004. Regulation 2 prescribes arrangements in relation to inheritance tax which must be notified. Regulation 3 provides that the duty to notify does not arise in relation to arrangements first made available for implementation, or entered into before 6th April 2011, or in respect of which a promoter first made a firm approach to another person before that date.

VALUATIONS
When determining the value of any real property for the purpose of obtaining probate, the personal representative should obtain a valuation. Ideally, the personal representatives should obtain three valuations from different estate agents {or one RICS valuation if a definitive figure is required}. The personal representative has a duty to take reasonable care to ascertain the value of the property. Of course, the valuation must satisfy section 160 of the Inheritance Tax Act 1984 which defines the market value for the purposes of inheritance tax as follows.
"The price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time."
Falling stockmarket and land prices can cause inheritance tax headaches for families. Inheritance tax valuations are made at the date of death so, families may find they are being forced to pay tax on a value that can no longer be realised. In an environment of falling house prices, personal representatives sometimes wish to reduce valuations after probate because prices continue to fall. HMRC says that it will only consider a revision if the original valuation was undertaken with incomplete or incorrect information.
We know from IRC v Clay {[1914] 3 KB 466}, that there should be no discount for a quick sale.
A further problem is that, once the inheritance tax value is fixed, no account is taken of falls in value unless relief is available under sections 178-198 of the Inheritance Tax Act 1984. This relief requires qualifying investments to be sold within 12 months of death, and land and interests in land within four years of death at less than probate value.
Many estates include quoted shares which are now worth substantially less than they were at the date of death. The beneficiaries of the estate may feel that it is better for the personal representatives to hang on to the shares and wait for an eventual upturn. It is important that everyone involved appreciates that inheritance tax will have to be paid on the original figure and that no loss on sale relief will be available once the 12-month period has elapsed, however low the eventual sale price. Even if the personal representatives do sell within the 12-month period, the relief is not given automatically; it has to be claimed. There is relief available where shares are suspended or cancelled and HM Revenue & Customs has special guidance available on its website for estates which included shares in Northern Rock.
In relation to land the period for sale is four years - extended in the last property slump from three years - so the problem is not quite so acute. However, many practitioners are complaining that they have property which is genuinely unsaleable, such as retirement flats where many flats in the block are empty and sales can only be made to certain categories of buyer. In cases where the pool of purchasers is not restricted in this way, it may sometimes be possible to sell to a beneficiary of the estate to crystallise the relief. Section 191 of the act provides that the relief is not available if the sale is to a person beneficially entitled to property comprising the interest sold or to a spouse, civil partner or issue of such a person.

VARIATIONS & DISCLAIMERS
If the personal representatives are unable to discharge the liability for inheritance tax, the beneficiary may be found liable. A beneficiary can escape liability by executing a disclaimer of the gift. Also, a beneficiary may wish to disclaim a gift, for instance, if the asset appears to require considerable expenditure. Like deeds of variation, disclaimers must be made in writing within two years of the death, not necessarily by deed provided it is clear what is being disclaimed and by whom. Unlike a deed of variation, one cannot disclaim part of a gift. The disclaiming beneficiary must not have benefited from the disclaimed gift between the death and the disclaimer. Section 142 of the Inheritance Tax Act 1984 applies to disclaimers as well as deeds of variation in this respect. The court has jurisdiction to vary trusts under the Variation of Trusts Act 1958. The starting point for both deeds of variation and disclaimers is section 142 of the Inheritance Tax Act 1984 Section 142 reads as follows.
“where within the period of two years after a person’s death:
(a) any of the dispositions (whether effected by Will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied or;
(b) the benefit conferred by any of those dispositions is disclaimed;
by an instrument in writing made by the person or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.”
Section 120 of the Finance Act 2002 has amended this section to the effect that a written election is no longer needed for a deed of variation to be treated as retrospective to the death, but instead the deed of variation must contain a statement made by all the relevant persons that they intend section 142 to apply to it so that it should be so treated. It is still possible to state that the deed shall operate for inheritance tax but not for capital gains tax or vice versa, for both taxes, or for neither. The effect of the new subsection 2 is, however, to compel the redirecting beneficiary to make that decision when the deed is drafted instead of having, as previously, a further six months from the execution of the deed to make a formal election. The technical inheritance tax requirements for a valid deed of variation, and other points to be borne in mind, are as follows.
A deed is not necessary and a letter will be enough, provided the other requirements are fulfilled.
The recipient need not be an existing beneficiary under the will or intestacy, nor need he be a member of the deceased’s family, and as indicated earlier a beneficiary can vary his entitlement even though he has already received it in whole or part from the personal representatives.
There must be no extraneous consideration for the variation. The only permitted consideration is the making, in respect of another of the dispositions, of a variation or disclaimer.
Interests created by a deed of variation which must end within two years of the date of death are ignored. Although more than one deed of variation can be executed if each relates to a separate asset, one cannot use a deed of variation to redirect property, the devolution of which has already been varied by an earlier deed. On the other hand, the use of section 142 to create a discretionary trust, followed by an appointment out of the discretionary trust within two years of the death to which section 144 applies, is not regarded as a double variation and the end result can operate retrospectively to the death. The appointment out of the discretionary trust should not, however, take place within three months of the death, since section 144 requires an event on which tax would be chargeable to have taken place since the death, and appointments from a discretionary trust within three months of the death do not constitute such an event {see Frankland v lRC [1997] STC 1450}.
The personal representatives of a deceased beneficiary can with the approval of the beneficiaries redirect a benefit. Care should be taken to consider the grossing up provisions of the inheritance tax legislation where residue is wholly or partly exempt and the deed increases the value of the taxable specific gifts to the point where the nil rate band is exceeded. One should also consider where relevant the effect of the deed on the complex rules relating to the attribution of business or agricultural relief to residuary gifts {contained in section 39A of the Inheritance Tax Act 1984}. An important point is that if a deed of variation is made retrospective to the death for inheritance tax purposes, the gift with reservation rules will not apply to it so that, for example, a widow may by deed of variation redirect some of her late husband’s chattels to their children whilst still retaining them in her home and without the need to pay a market rent for them. The chattels will not then become liable to inheritance tax on her death, whenever it occurs. A copy of the deed only needs to be submitted to the Revenue where the amount of inheritance tax payable is altered as a result of the deed. If the inheritance tax does increase, a copy must be sent to the Revenue within six months of execution of the deed.
Unlike a deed of variation, a disclaimer cannot operate over the deceased’s share of jointly owned property. The disclaiming beneficiary can only benefit the beneficiary who would have been entitled but for the provision of the Will containing the disclaimed gift, or who would have been next entitled on intestacy. Unlike deeds of variation, there is no requirement for such a statement and if the disclaimer otherwise fulfils the requirements it will automatically be treated for inheritance tax purposes as though the disclaimed property had passed to the recipient on the death.
The capital gains tax position on both deeds of variation and disclaimers is governed by section 62 of the Taxation of Chargeable Gains Act 1992. It is similar to section 142 of the Inheritance Tax Act 1984 in relation to inheritance tax, but instead of referring to “the property comprised in his estate” the reference is instead to “the property of which he was competent to dispose”. It is however difficult to see any practical distinction now between the two. If the deed of variation or disclaimer complies with section 62 its execution does not constitute a disposal for the purposes of capital gains tax provided that, in the case of a deed of variation only, the persons making it state that they intend the subsection to apply in that way. This requirement has, as in the case of inheritance tax, replaced the need for an election, and, again, requires the decision about how the deed is to operate to be made when it is drafted. It appears, however, no longer to be necessary to submit a copy of the deed to HM Inspector of Taxes for it to be treated as retrospective to the death for capital gains tax purposes, although one may of course be asked to submit one subsequently, eg to establish the identity of the settlor if the deed creates a trust. Care should however be taken in deciding whether to include a statement that the deed is intended to be retrospective for capital gains tax purposes. If the redirected asset has risen in value since the death, and the beneficiary making the redirection has unused annual exemption or losses which will absorb that gain and provide the recipient with a higher base value, it may not be appropriate for the statement to be included. Care will also be needed if the assets have fallen in value and are redirected in favour of a connected person. Unless the statement is included the redirecting beneficiary can only set the loss arising on the redirection against gains on subsequent gifts to the same recipient and cannot use them against other gains, and the recipient’s acquisition cost will be the value of the asset at the date of redirection. If the statement is included he takes the asset at probate value and the connected persons provisions will not apply. Even if the statement is included, the redirecting beneficiary may still be treated as the settlor for the purposes of capital gains tax, if the assets pass under the deed to a trust for that person’s minor children or if the offshore trust provisions apply to it.

PART TWO - RATES & EXEMPTION

2 Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2011 {SI 2011/214}

INTER VIVOS
There are two exemptions that apply to inheritance tax on gifts inter vivos. On the one hand the annual exemption of £3,000, and on the other hand tapering relief.
Lawyers advising wealthy clients should also be aware of section 21 of the Inheritance Tax Act 1984. This allows relief for normal expenditure out of income. This is a useful relief because gifts are immediately exempt. In addition, there is no prescribed limit, so long as the conditions are met. The conditions are: first that the gift must be made as part of normal expenditure; second that the gift must be made out of income, taken year on year; and third, that after taking account of all gifts forming part of normal expenditure, the donor must be left with sufficient income to maintain their normal standard of living. The relief is particularly useful for regular monthly payments to charities or family members. As long as the gifts are affordable on a regular basis out of income, they qualify for relief. Gifts that are comparable in size are likely to be accepted as part of normal expenditure, but if there are significant fluctuations, the exemption might be challenged. Gifts of capital and of capital assets are not however likely to be exempt unless the asset in question is purchased out of income specifically for the recipient. ‘Income’ is not defined but the fact that receipts are regular does not make the receipts income for this purpose. Perhaps the most common example is the annual 5% withdrawal from a non-qualifying insurance policy. These are not chargeable to income tax within the specified income tax limits because they are considered returns of capital. The approach for inheritance tax purposes is consistent with this, though the treatment is perhaps arguable if the capital value of the bond is maintained.
The key test is whether or not the donor needs to resort to capital to meet ordinary living expenses and so each claim to exemption will be determined by the individual donor’s particular circumstances. It is possible to take one year with another in determining whether or not this condition has been met, but in practice HMRC will take account of current income and expenditure on a tax year basis. A donor may wish to store up surplus income from a number of years in order to make gifts, but in such circumstances the exemption might not be forthcoming.
This is a very valuable relief but great care must exercised, especially in cases where the intention is to gift the maximum amount, i.e right down to the level of income actually required to maintain the standard of living. It is essential that good records are maintained so that executors can readily demonstrate that gifts were made ‘out of income’. When used correctly the exemption can prevent the value of the inheritance tax estate from increasing. The gifts can be used in any number of ways, perhaps the most common being the funding of life insurance premiums and stakeholder pensions for the younger generations, and in the larger cases for transfers into trust, which would otherwise attract inheritance tax at an effective rate of up to 20%.
Tapering relief is a well known relief. When a gift is made between two people, it will still be considered part of the donor's estate if the donor dies within seven years of the gift being made. This could make the gift liable for Inheritance Tax on death, decreasing over the 7 year term. If the donor survives for 7 years, the relief is 100%, and no inheritance tax is payable.
An interesting case has recently been published dealing with the inheritance tax implications of a contribution to a funded unapproved retirement benefit scheme, namely, Executors of Dr Postlethwaite v HMRC {SpC 571}. Harvey Postlethwaite was a big wheel in Formula One; he was the driving force and sole shareholder of a company which supplied various relevant services. It was extremely profitable and a contribution of £700,000 was made into a funded unapproved retirement benefit scheme for his benefit. This would ordinarily have been taxable except that he was not UK resident so no income tax issues arose. However, the Capital Taxes Office took the view that the contribution gave rise to an inheritance tax charge. Postlethwaite was UK domiciled, he held shares in the company and if a payment by the company into a funded unapproved retirement benefit scheme was a transfer of value, it could be attributed to him by reason of section 94 of the Inheritance Tax Act 1984 and he could be charged inheritance tax as if he had made the transfer of value himself.
In many cases this will not be a problem because of the exemption in section 12 of the Inheritance Tax Act 1984, for expenditure which is deductible for corporation tax purposes; others will be covered by the exemption in section 13 relating to contributions to employee trusts. However, neither of these exemptions could apply in these circumstances having regard to the nature of the funded unapproved retirement benefit scheme and the fact that the company was non resident.
Postlethwaite argued that there was no transfer of value because this payment satisfied the precise conditions of section 10 the Inheritance Tax Act 1984, ie that it was not intended to confer a gratuitous benefit on any person - the contribution was made as a reward for his services. An important part of the judgment is that the absence of a binding commitment or legal obligation did not matter. The contribution to the funded unapproved retirement benefit scheme was not a condition of Postlethwaite's services but was the result of a subsequent decision. The special commissioners did not feel that section 10 should be limited to dispositions under a legal obligation and although the consideration may have been past - and in strict legal terms therefore unenforceable - that did not mean there was an intention to confer a gratuitous benefit, provided that the past consideration was commensurate with the benefit conferred.
The ratio decidendi of Executors of Dr Postlethwaite v HMRC is that absence of binding commitment or legal obligation to confer a benefit does not matter for inheritance tax purposes.
Inheritance tax has particular relevance during drawdown. Many people with personal pension schemes who are about to retire will often be advised by their independent financial adviser to put their pension into drawdown. Given the poor annuity rates this is a fairly normal and sensible procedure and will involve money being taken out according to the Revenue's rules. However, a particularly nasty sting in the tail exists of which many people are unaware. If the taxpayer dies during the drawdown period then the amount left in the pension scheme will be subject to what is known as a ‘special lump sum death benefits charge’ at the date of death. This is governed by section 206 of the Finance Act 2004 and amounts to an income tax charge of 35% on the sum left in the pension. The section also allows for the Treasury to alter the rate of 35%. The result of this is that even if the pension arrangements are that the fund is to pass to a surviving spouse, they will only receive the balance of the fund, net of 35% UK income tax. This is often not spelt out to people taking out pensions and is a stealth tax which is not properly understood by many. The legislation provides that it is the pension scheme administrator who is liable to pay this charge. Upon the death of the pensioner, the pension fund trustees must pay the money over to the Revenue. The surviving heirs will then receive the pension fund after 35% has been deducted in income tax. Although it would normally be expected that only inheritance tax should apply on death, the provisions do not work like this. Section 206 of the Finance Act specifically classifies the money as subject to income tax, even though it is clearly a capital sum in the pension fund. In fact the legislation states that the lump sum death benefit is not to be viewed as income even though income tax is payable on it. Essentially the Revenue is clawing back the income tax relief it gives when contributions to the fund were made. It brings into question the sense of having a pension, as the main reason for tying your money up with a pension fund is to get the tax relief – without this no one would have one.

NRB DISCRETIONARY TRUSTS
The most important relief from inheritance tax is the nil rate band. The inheritance tax nil rate band will be frozen at its current level of £325,000 until the end of tax year 2014/15. A testator should always make use of the nil rate band. The rules on intestacy fail to use the nil rate band effectively. For those drafting wills, the best way to use the nil rate band is often to create a nil rate band discretionary trust, especially where the biggest asset is the matrimonial home.
Any solicitor setting up a trust, or managing one, needs to be aware of all the different taxes that might apply; these are income tax, capital gains tax, inheritance tax, and stamp duty land tax. The last of these applies to trustee disposals in exactly the same way as to any other disposals, and so needs no special mention. However, the other three all apply to trusts in special ways. What's more, each of the three main taxes now has different tests to determine whether a trust is transparent. No trust rules apply uniformly to the same taxes. Generally, if the settlor is capable of benefiting from the settled property, the trust is regarded as transparent, and so will not receive favourable tax treatment. For inheritance tax purposes it is the settlor who is important: if the settlor is able to benefit from the settled property, this is a gift with a reservation and the settled property remains in their estate for inheritance tax purposes. It does not matter whether their spouse or family can benefit from the settlement; all that matters is whether the settlor can benefit.
There is a real danger of trust assets being eroded through a combination of income tax at 50 per cent, capital gains tax at 28 per cent and the impact of the changes to the inheritance regime introduced in 2006. Therefore, arrangements should be structured as tax efficiently as possible for the benefit of the beneficiaries in the light of these new developments.
Most lawyers, whether advising on lifetime tax planning or advising executors after the death of the first spouse, can deliver a well rehearsed speech on the importance of including a nil rate band legacy in wills. It is indeed true that inheritance tax can be minimised in this way. The mechanics of implementing the trust after the first death, are to use a debt or charge to satisfy the nil rate band legacy in situations where the family home is the most significant asset. However, there are significant administrative costs necessary when running these trusts. In the typical case, there are insufficient liquid assets in the estate to satisfy the entire nil rate band legacy. However, the deceased spouse's half share of the family home is of sufficient value to satisfy the entire legacy.
To satisfy the nil rate band legacy the executors will need to use the deceased spouse's half share of the family home to make up as much of the nil rate legacy as possible. Ideally the will contains provisions allowing the trustees of the nil rate discretionary trust to accept either an IOU from the surviving spouse or an equitable charge over the deceased spouse's half share of the family home. In many cases no liquid assets are left in the trust. It was perhaps thought in the past that the arrangements could lie dormant, usually until the death of the surviving spouse.
Best practice now suggests that once constituted, these trusts should be managed on a proper and continual basis. At the very least the trustees should hold annual meetings. At these meetings, the trustees should review the trust fund investments and consider the personal and financial position of the potential beneficiaries of the trust before deciding how to exercise their discretion in their favour. Minutes of these meetings should be signed by the trustees and kept safe. From a risk management perspective, the greatest danger arises where trusts are established and then left dormant.
Potential difficulties arise from the trustees accepting payment from, say, the surviving spouse, to meet the cost of administering the trust. This is an addition to the trust fund and therefore section 67 of the Inheritance Tax Act is relevant. Questions may also follow about the extent to which the trust fund remains outside the survivor's estate.
When drawing up a nil rate band discretionary trust, the testator should leave a cash reserve in the trust rather than appointing all the liquidity to the surviving spouse. Where the nil rate band trust was constituted entirely with a debt owed by the surviving spouse to the trustees, the cost of undertaking annual reviews of the arrangement might be funded by the trustees resolving to recall part of the outstanding debt from the surviving spouse. This would create a cash fund out of which future trust expenses may be paid. The cash would, of course, be an income-generating asset in respect of which annual tax returns should be submitted to the Revenue. However, the completion of annual returns together with the trustees exercising their discretion to recall part of the debt could be invaluable evidence to substantiate the debt, ie demonstrating that it is not an artificial arrangement designed to avoid paying inheritance tax. Professional fees incurred by recalling part of the debt from the surviving spouse should be viewed in the context of the overall potential inheritance tax saving.
. In theory the same issues apply to nil rate band trusts implemented solely using an equitable charge. However, the property is usually assented to the surviving spouse, subject to the charge, who has no personal liability towards the trustees to repay it. In practical terms this option is only available if the survivor wishes to move to a cheaper property, allowing a cash reserve to be created at that point.
. Where the debt is either index linked or alternatively provides for interest to be rolled up, it is worth remembering that there may be tax to pay in respect of the gain when any part of the debt is called in. Any decision to create a cash reserve will need to be taken with this in mind.
The value to practitioners of focusing on the administrative and compliance aspects of running a nil rate band discretionary trust at the outset lies in, first, reminding trustees that they need to manage these arrangements actively, and, second, avoiding the problem of funding trust administration costs in the future. Adopting an integrated approach to the creation and subsequent administration of nil rate band trusts can make life that little bit easier for the practitioner.
Any formal express trust needs to be managed on a proper and continual basis. At the very least the trustees should hold annual meetings.

BUSINESS PROPERTY RELIEF
Business property relief is a complete relief of 100% of any inheritance tax liability. Section 104 of the Inheritance Tax Act 1984 provides that relief is available for business property. "Relevant business property" is defined in section 105 as ‘a business or interest in a business’. Section 104 of the Inheritance Tax Act 1984 applies business property relief as follows.
"Where the whole or part of the value transferred, transfer of value is attributable to the of any reIevant business property."
Section 110 defines ‘value of a business’ as the value of its assets reduced by its liabilities.
There has been an important case recently about business property relief, namely Revenue v Nelson Dance Family Settlement {[2009] EWHC 71}. Nelson Dance carried on a farm business as a sole trader. The assets of the business included land and buildings. He transferred some of the land, which had substantial development value, to a discretionary settlement and died shortly afterwards. The transfer would attract inheritance tax unless it qualified for 100% relief. It was common ground that the land attracted agricultural relief on the agricultural value of the property, but that left the very considerable development value unrelieved. The land was used in the farming business but Mr Dance did not transfer a business or an interest in the business to the trustees; he just transferred the land. The Revenue said that business property relief was not available.
It was widely understood that unless you transfer relevant business property you do not qualify for the relief. The land transferred by Dance was not itself a business or an interest in the business. However, HMRC lost its appeal from the special commissioners. HMRC lost before the special commissioners and also in the Chancery Division of the High Court.
The High Court held that all that is necessary for relief to be available under section 104 is that the value transferred can be attributed to the value of the deceased’s business. It is irrelevant that it is also possible to attribute value to the assets transferred. The wording of section 104 is convoluted, but in the case of a business there is a direct cross-reference to the simple test in section 110 to determine whether the value transferred is attributable to the value of the business. The operation of section 104 does not require a choice to be made to make an attribution exclusively to one category or the other. If the land transferred was used in the business then the value to be attributed to it would, inevitably, also be attributed to the value of the business by section 110.
This reading of the legislation makes life much simpler for taxpayers by giving a straightforward test. However, it raises a query as to the policy behind business property relief. The transfer the deceased made was not made for the purposes of his business. In fact it was made with the intention of removing assets from his business without consideration. In the present economic climate, it might not be too surprising if the government took a close look at the detail of business property relief.
The decision in Trustees of The Nelson Dance Family Settlement v Revenue and Customs Commissioners provides a new slant on business property relief for inheritance tax.
Business property relief even applies where an unquoted trading company has substantial non trading assets; the value of the shares qualifies in full for 100% business property relief-even on the value attributable to the investments. Section 105 of the Inheritance Tax Act 1984 provides that shares in an unquoted trading company are eligible for 100% business property relief unless the business of the company consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments. A trading company with a substantial investment portfolio can still qualify for the relief, despite the existence of the investment portfolio, if the business of the company is not wholly or mainly that of an investment company. Section 112 of the Inheritance Tax Act 1984 which defines excepted assets, does not apply because all the assets of the company would be used for the purposes of a business; some would be used for the trading business and some would be used for the investment business - the only exception being substantial cash deposits which may be neither.
The case of Executors of Rhoda Phillips deceased v HMRC {SpC 555} brings a new dimension to this thinking. The special commissioner held that just because a loan is made to an investment company does not make that loan an investment. The fact that the company to whom the loans were made was controlled by the deceased and her family did not make any difference either. Nor did the fact that the loans were not made on commercial terms. Business property relief was allowed in full.
While one can understand that this reasoning follows the terms of section 105 of the Inheritance Act 1984, it exposes a loophole in the business property relief legislation. If I have a property investment company with £1m worth of properties, the shares in the company do not qualify for business property relief because the business of the company is disqualified consisting wholly or mainly of property investment. If I have £1m in a personal investment portfolio that does not qualify either. However, if I form a new company and subscribe for £1m of shares and then lend the money to my property company, I can generate £1m of business property relief because the business of my new company will not consist wholly or mainly of holding investments.
The case of HMRC v Executors of the Earl of Balfour {[2010] UK UT 300} has recently been heard by the Upper Tribunal. This is a most interesting and valuable case as it analyses the meaning of business property for the purposes of inheritance tax. This was a Scottish case involving Scots law but there are important elements relating to inheritance tax which, of course, applies to the whole of the UK.
Lord Balfour had an interest in a farming partnership and was the proprietor of a landed estate comprising of approximately 2,000 acres which consisted of two in-hand farms, three let farms, two sets of business premises and 26 let houses. There were also some parks which were let on a seasonal basis. Lord Balfour made no distinction between the partnership and the estate. His own view seemed to be that everything was run as a single business. The First Tier Tribunal agreed that the whole of the activities represented a single business and that the entirety qualified for business property relief. HMRC appealed to the Upper Tribunal which confirmed the decision in favour of the taxpayer. The First Tier Tribunal had decided that as a question of fact, Lord Balfour operated a single composite business and the Upper Tribunal did not feel able to disturb that finding.
Some important implications would seem to arise from this judgment particularly in connection with the twenty-six let properties. It would generally not have been doubted that the passive holding of 26 let properties and the receipt of rent represented an investment activity. The fact that the properties were situated on land on which other activities took place does not make them anything other than pure investment properties. However, the First Tier Tribunal did not even mention the existence of section 112 of the Inheritance Tax Act 1984 — nor did the Upper Tribunal on appeal.

ACCOUNTING TO THE REVENUE
In order to obtain a grant of probate, one must complete the probate application form. This form asks for details of the deceased and the applicant. The applicant must also supply the death certificate and the original will.
In addition, the applicant must also submit a form which contains an account of the estate. The form for stating the account of the estate is currently called IHT400. It requires a detailed list of all the assets of the deceased. The applicant should try to obtain the full value of all items shown, including any interest or bonus, which will be paid. Any money due from the deceased's employer should be included. The full market value of any house should be shown, although a professional valuation is not normally required. The value of household goods, jewellery and belongings should be shown as the amount for which they could be sold.
The majority of estates actually fall below the nil rate band, and so are excepted from the requirement to submit IHT400. In this case, the applicant merely submits IHT205, which is a much shorter form.
On the 1st March 2011, the Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2011 {SI 2011/214} came into force. They amend the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004 {SI 2004/2543} relating to the circumstances in which an inheritance tax account does not need to be delivered. They amend provisions relating to the information that must be produced to the court or office in cases where an inheritance tax account is not required. They also prescribe the circumstances in which a personal representative of an estate benefiting from a transferred unused nil rate band may submit an excepted estate return.

NOTE TO LAWYERS
If you intend to quote one of these cases to a judge, first you must obtain a full copy of the judgment. Use "The Law Reports Index" or "Current Law Case Citator". Judges are entitled to insist upon sight of a full copy of the judgment, before they take notice. When citing a case reference, however, always use the neutral citation.

MULTIPLE CHOICE TEST Subscription Area: Property Title of Recording: Inheritance Tax (Dec 2011) NAME OF LAWYER............................................................................................... RING THE CORRECT ANSWER PART ONE - LIABILITY & DOMICILE Question 1: Henry and Kate Percy jointly owned a substantial estate comprising: a holiday home in Italy; a portfolio of UK shares; an account at the bank; their farm in England, which they operate as a business. Each of these four assets is worth half a million pounds. They have one son, Hotspur. Neither Henry nor Kate has a will. Henry died in April 2011. How much IHT will be payable? A £800,000 B none, as everything passes by survivorship C none, as everything enjoys spouse exemption Question 2: Is the home in Italy included in the estate? A yes B only if they have English ancestry C no Question 3: In order to improve the tax position for Hotspur, what action could Kate take? A make a disclaimer of £325,000 of the bank funds B make a variation of £325,000 in favour of Hotspur C apply under the Inheritance (Provision for Dependants) Act 1975 PART TWO - RATES & EXEMPTION Question 4: At what rate would Kate pay IHT, if any is due? A 50% B 40% C 25% Question 5: Will any of their property qualify for business property relief? A no B the portfolio of shares C the farm Question 6: What form will be used by the personal representatives to submit the calculation of IHT? A IHT400 B IHT205 C IHT200

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