IHT settlements and associated operations

The essential Inheritance Tax base is the transfer of value – the disposition which results in a reduction in the size of the transferor’s estate. IHT therefore taxes what the transferor or donor loses rather than what the transferee or donee gains. In simple cases, a gift of cash for example, the two will be the same. In other cases it may not be. For example, the value of a 2% shareholding in an unquoted family company by itself may be worth little in the hands of a donee to whom it is gifted, but if the donor had previously held a 51% controlling shareholding in the company the loss to his estate will be much greater. Conversely, it is now generally accepted that the value in the hands of the tenant of the traditional, non-assignable agricultural tenancy, under which the tenant enjoys security of tenure, is very low. The loss of value by the tenant, from surrendering the tenancy may therefore represent a small transfer of value, but the increase in the value of the landlord’s freehold will nevertheless be substantial. It is, therefore, not surprising that the IHT Act 1984 does contain anti-avoidance legislation intended to prevent the undue exploitation of valuation anomalies, among them Section 268 of the IHT Act 1984, directed at transfers of value effected by “Associated Operations”.This has been considered by the High Court in Rysaffe Trustee Co (CI) v IRC 2002 STC 872.