The Gazette 1979

GAZETTE

MARCH 1979

(provided that she keeps within the limits of a

"genuine" farmer).

2. That the remainder of his property comprises a

Trust Fund for the education, maintenance and

advancement of his children with power to his wife

to appoint the property to his children as she shall

decide and in default of such appointment to the

children equally.

On his death there is no liability to Inheritance Tax.

Seven or eight years later his wife divides the farm

between her two sons (having made appropriate provision

for her two daughters) using her power of appointment

and through a Deed or Will makes over the share she

inherited under her husband's will; there is no liability.

If she makes over the entire farm to one son, however,

(subject to suitable provisions for the three children) there

will be a liability; at this stage, however, a half a million

pounds worth of assets will have been vested in one son

without liability; the liability is confined to the surplus

over that, i.e. £100,000.00 less the value of benefits to

the other children — a liability of perhaps £25,000.00 or

less. This contrasts very favourably with all the other

examples; apart from saving substantial tax this man has

probably disposed of his property in the way he desires.

It is possible to work a lot of permutations on this basic

example which, depending on the assets and

circumstances will save Inheritance Tax entirely or at

least make a very substantial saving. If the family are

grown up with one son working on the farm and the other

three children "done for" it may be possible to eliminate

the complications of trusts and powers of appointment.

For example a tenancy in common could be created in the

farm by transferring a 5/12th share to his wife, a further

5/12th share to his son and retaining a 2/12th share. I

have taken these figures because the 5/12th share is

worth £250,000 or equal to the threshold and the transfer

of these shares does not create any liability to Inheritance

Tax. The wife can then will her 5/12th share (It is

suggested that there is not need to wait the three years) to

her son and this in turn will avoid Inheritance Tax. The

son will ultimately have to pay Inheritance Tax on the

remaining 2/12ths share, assuming this is willed or

transferred to him at approximately the same level as in

example 4 — say about £25,000.00. Before this

happens, however, there is the hope that thresholds may

be increased and conversely the risk that inflation may

increase the liability.

If the wife acquires the property under her husband's

will she can make an inter vivos gift to her son and this

will not, even if it is made immediately, be treated either

s a gift or an inheritance from the father. The "three-

year rule" whereby a gift from B to C, if made within

three years of a gift from A to B is treated as a gift from A

fo C only applies where both transactions are gifts. If one

is an inheritance the rule does not apply.

It will be observed that there is one common

denominator in these examples and that is that it is

essential to pass a share up to the threshold of

£250,000.00 through the wife. This obviously makes it

desirable to ensure that the wife gets her share — a

certainty that can only be achieved by a transfer because

under a will there is always the risk that she will predecease.

It may well look very simple from these examples but

there are some dangers, risks and pitfalls that have to be

watched.

The Wife or Surviving Spouse

1. The first danger is contained in the anti-avoidance

provisions of the Act. These are designed to prevent tax

avoidance by gift splitting.

For a period of three years after a wife receives a gift

from her husband any inter vivos transfer or gift of the

property to a child is deemed to be a gift to that child

from his father and will therefore be aggregated with any

benefit that that child has already received. Effectively,

therefore, a wife must survive three years from the date of

a gift before she can dispose of it by gift to a child in such

a way that he will enjoy the full threshold both from his father

and mother.

It is obviously important that as soon as a wife receives

a gift she must make a suitable will. Otherwise two-thirds

of her property would revert on her death to her husband

on intestacy or might go in an unintended direction under

an earlier will. In the circumstances that we are

considering she will, if she has not already made an inter

vivos gift to her son, obviously devise her share in the farm

to the son intended to receive same. But it remains certain

that there is no chance of achieving the double threshold

for a child, unless the husband vests portion of the

property in his wife, even if some risks have to be run for

the three year period. Incidentally, any risk arising for

such a short period might be economic to insure in the

case of younger couples.

(2) Capital Gains Tax

This does not arise in the case of wills or inheritances

because a person acquiring the assets of a deceased

person is deemed to acquire them for a consideration

equal to their market value at the date of death. A transfer

or settlement of land, however, does constitute a disposal

of assets for the purpose of Capital Gains Tax — even a

transfer to a wife or son. In most cases liability is not likely

to arise because relief will be enjoyed under one or other

of the following provisions:

(a) If the property has been in the ownership of the

person making the gift or of the spouse of the owner for a

period of 21 years there is not tax (assuming the lands

have no development value).

(b) A person aged 55 years may dispose of all or any

of his qualifying business assets such as farmland

stock and equipment to a child without liability for

Capital Gains Tax. This only applies to qualifying

assets, however, i.e. assets owned for a period of

not less than 10 years.

husband is treated as a disposal for a consideration

of such an amount as secures neither a gain or a

loss. (Section 13 (5).)

This Section does not apply to an asset that

forms part of trading stock of a trade carried on by

the person making the disposal or if the asset is

acquired as a trading stock for the purpose of a

trade carried on by the person acquiring the asset.

For definitions of trade and trading stock see

Section 52 of the Income Tax Act 1967.

It would seem to follow that where a person inherits

property say, on the death of his father, and settles it

without delay thereafter there would be no material

liability to Capital Gains Tax because he would be

deemed to have acquired it for market value at the date of

death.