Following our Blog piece on Capital Gains Tax (CGT) and chattels https://src-time.co.uk/chattels-and-capital-gains-tax/, clients have asked us how chattels are dealt with under Inheritance Tax (IHT). We set out below a simple guide to the IHT rules, which considerably differ from the CGT ones.
What are ‘personal chattels’?
Personal chattels are defined by the Inheritance and Trustees’ Powers Act 2014 as ‘all tangible movable property’ except for property:
• Consisting of money or securities for money; or
• Used at the death solely or mainly for business purposes; or
• Held at the death solely as an investment.
This will include paintings, furniture, silver, jewellery and so on.
The monetary value of chattels can well amount to a tidy sum, resulting in a substantial IHT liability at 40% in the absence of an exempt gift to a surviving spouse/civil partner.
Wills: the Letter of Wishes problem
Under a will, particular chattels can be left to particular individuals.
To the extent that they are left to a surviving spouse or civil partner, the gift is exempt from IHT. However, to the extent that the survivor distribute the chattels in accordance with a letter of wishes within two years of the death, a specific provision in the legislation has the automatic effect that for IHT purposes the ultimate beneficiary is then regarded as the original donee under the will, so creating a chargeable transfer to that extent.
The intended beneficiary may be unwilling to want to wait until after the expiry of the two years in order to receive the bequest. While the surviving spouse/civil partner would be faced with the issue that, having waited two years to pass on the chattels, this has now become a potentially exempt transfer (PET) by her/him, to become exempt on survival for seven years in order to avoid an IHT charge.
A Solution to the problem
A solution is for all the chattels (perhaps along with other property) to go into an immediate post-death interest in possession trust for the survivor and have the trustees make the distribution under the letter of wishes, which, however short a time after the death, causes the survivor to make a PET and is not written back into the will. This means that any potential IHT exposure is shortened by two years.
Chargeable value on death for IHT purposes is ‘market value’. This is defined as ‘the price which the property might reasonably be expected to fetch if sold on the open market at that time…’. HMRC specifically emphasises the importance both of including all the household and personal goods owned by the deceased and in valuing them on the proper statutory basis.
Moreover, this point is emphasised in the form which must be completed after a death to give the details of the chattels: Schedule IHT 407, the four sections of which deal separately with:
(b) vehicles, boats and aircraft
(c) antiques, works of art or collections and
(d) household and personal goods.
Individual items of jewellery valued at £500 or more must be detailed, together with a professional valuation if obtained. Indeed, all items with a value of £500 or more should be valued professionally. If at the time of completing the Inheritance Tax Account any goods have already been sold, the gross sale proceeds must be recorded as assumed to be the value at death, with no deduction allowed for professional costs of sale.
It should be remembered that insurance valuations are not the same as market valuations and HMRC will not accept them as such.
Exceptionally valuable pieces
In the art and antique world, valuations can fluctuate considerably from year to year. What will matter is the value at the date of death. Supposing that the market valuation comes up with, maybe, £100,000, £200,000, £500,000 – or even more? In the absence of a surviving spouse and subject to an available nil-rate band, IHT at 40% will be payable. Of course, the chattel or chattels concerned can always be sold to pay the tax, but if say the children want to retain them, they will have to find the money from elsewhere.
In future Blog pieces we will look at ways to deal with this thorny issue.
SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.