Where someone is left a specified income for life, rules are needed for inheritance tax purposes to determine the value of the underlying capital assets that generate the income. These rules also determine the capital value attributable to any person who has the right to receive the balance of the income after the specified income has been paid.
Anti-avoidance provisions set upper and lower limits to the investment yield which can be used in these calculations: these limits are specified in secondary legislation and have been revised by the Inheritance Tax (Settled Property Income Yield) Order 2000 (SI 2000 No.174) which has been laid today before the House of Commons.
This updates the wording of an existing Order when describing the dividend yield on the FTSE All-Share Index, following the change – since 6 April 1999 – by the compilers of the Index to publish an “actual yield” in place of the “gross yield” quoted by the existing Order.
1. The Treasury may prescribe upper and lower limits to the income yield that can be used for the calculation of the value of assets backing an annuity or the balance of assets attributable to other beneficiaries. The new Order provides that the lower designated rate is to be the actual dividend yield compiled for the FTSE All-Share Index in place of the former “gross yield” which is no longer calculated. The upper limit remains the yield compiled for irredeemable gilts.
2. The general rule under section 50 of the Inheritance Tax Act 1984 (IHTA) is that someone with a beneficial entitlement to the income of settled property is treated for inheritance tax purposes as being beneficially entitled to the property itself. This means that on their death, there is a charge to inheritance tax on the value of the relevant assets in the settlement.
3. Special rules apply for the valuation if they are entitled to part only of the income from a particular bundle of assets. Normally the value of the individual’s share, or where relevant the value of the balance, is found by reference to the income yield of the assets in the settlement. But anti-avoidance provisions provide for a floor and a ceiling yield to be used for valuation purposes where the actual yield would otherwise lead to extreme results. This Order adjusts those limits.
4. The Order comes into effect on 18 February 2000. Copies will be available shortly from the Stationery Office and on the Inland Revenue’s home page at the address given below.
5. All enquiries, about the possible application of these rules in particular cases, should be directed to The Capital Taxes Office, Ferrers House, PO Box 38, Nottingham, NG2 1BB.
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