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Finance Act 2012

Details of the new Schedule 1A to IHTA

3.New paragraph 1 provides that the Schedule applies on the death of an individual where the net value of their estate (after deducting liabilities, reliefs and exemptions) exceeds the available nil-rate band. The excess value of the estate above the nil-rate band is subject to IHT at 40 per cent and is referred to in the Schedule as “TP”. New Schedule 1A does not apply if the net value of the estate is below the available nil-rate band.

4.New paragraph 2 describes the relief.

  • New paragraph 2(1)(a) provides that a part of TP will qualify for the lower rate of IHT if it meets the charitable giving condition.

  • New paragraph 2(1)(b) provides that any remaining part of TP that does not qualify for the lower rate is to be taxed at 40 per cent.

  • New paragraph 2(2) provides that to meet the charitable giving condition, at least 10 per cent of the ‘baseline amount’ must be given to charity.

  • New paragraph 2(3) and (4) say where provision is made for the ‘components’, ‘donated amount’ and ‘baseline amount’.

  • New paragraph 2(5) provides that the part of TP that qualifies for the lower rate is all of the property in each of the ‘components’ of the estate where the amount donated to charity is at least 10 per cent of the baseline amount for those components (the ‘10 per cent test’).

  • New paragraph 2(6) provides that the lower rate of tax is 36 per cent.

5.New paragraph 3 divides the estate into three parts or ‘components’ for the purposes of the new Schedule 1A: survivorship, settled property and general. New paragraphs 3(2) to (4) define the property that is included in each of the components.

  • The survivorship component is made up of property which passes automatically to a surviving joint owner.

  • The settled property component consists of assets in certain trusts in which the deceased had a life interest or right to income immediately before their death and which are treated as part of the deceased’s estate.

  • The general component includes all other property that makes up a person’s estate, including the free estate, which is not part of the survivorship or settled property components. This does not include property subject to a reservation (where the deceased continued to benefit from the property given away) which is treated as part of the deceased’s estate. Such property can only qualify for the reduced rate if an election is made to merge it with one of these three components.

6.New paragraph 4 provides that the ‘donated amount’ for a particular component or part of the estate is the total value of gifts to charities or registered community amateur sports clubs that are paid from that component and which qualify for exemption as gifts to charities or registered clubs under section 23(1) of IHTA.

8.New paragraph 5 provides for the calculation of the ‘baseline amount’ and sets out three steps to the calculation. The first is to arrive at the value transferred by the chargeable transfer, which is the gross value of assets in the component after deducting liabilities, reliefs and exemptions. The second step is to deduct the proportion of the available nil-rate band that is attributable to the component. The available nil-rate band is the amount left after allowing for any increase that arises from the transfer of unused nil-rate band under section 8A of IHTA and taking into account any chargeable transfers made during the seven years before death. The third step is to add back the value of gifts paid from that component which qualify for exemption as gifts to charities or registered clubs under section 23(1) of IHTA.

9.New paragraph 6 provides that the normal rules for establishing the taxable amount of the estate will apply in determining whether the 10 per cent test has been met with two specific exceptions.

  • New paragraph 6(1) provides that for the purposes of calculating the donated amount and the baseline amount, any calculations under section 38(3) or (5) IHTA (grossing up) will be made using the lower rate.

  • New paragraph 6(2) provides that, for the purposes of calculating the donated amount (but not the baseline amount) any reduction in the value of a specific gift to charity that would normally arise through the interaction of exemptions and relief under section 39A IHTA is to be ignored.

10.New paragraph 7 provides for an election to merge two (or more) parts of an estate where the donated amount from one component is at least 10 per cent of the baseline amount for that component. If the qualifying component and one or more eligible parts of the estate pass the 10 per cent test when combined, new paragraph 7(3) provides that they are to be treated as a single component which will qualify for the lower rate. The eligible parts of the estate for such a merger include the other components and property subject to a reservation which is treated as part of the deceased’s estate. The election has to be made by all the “appropriate persons” specified in new paragraph 7(7), who may vary depending on the parts of the estate being merged.

11.New paragraph 8 provides for an election to opt out of the lower rate for one or more components of the estate so that they are treated in effect as if the charitable donation had failed the 10 per cent test. The election has to be made by all the same appropriate persons as specified in new paragraph 7(7).

12.New paragraph 9 provides the procedure for making an election under Schedule 1A. An election must be made in writing within 2 years of the death and may be withdrawn in writing (by all those entitled to make the election) no later than 2 years and 1 month after the death. New paragraph 9(3) provides that both these time limits may be extended at the discretion of an officer of Revenue and Customs.

13.New paragraph 10 provides interpretation of specific terms used in Schedule 1A.

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