IHTM14810 - Lifetime transfers: omissions: omission to exercise a right
IHTA84/S3(3) provides that, subject to certain requirements discussed below, the omission to exercise a right may be treated as a disposition and as such will be a transfer of value and, if not within any exemption, a chargeable transfer.
Example
Andy owns property but, some years ago, Boris secured the right to acquire it at a price below its current market value. The right had to be exercised before 1 January 2001 which Boris deliberately fails to do and in effect decreases his estate but increases Andy’s. Subject to exemptions, the gift is taxable.
The right
The requirement is that there shall be a ‘right’ which a person (the transferor) is in a position to exercise.
- The right may either be one connected with property or be purely contractual.
- This does not include rights that are primarily of a personal or non-pecuniary nature, the non-exercise of which do not diminish the value of the right-holder’s estate such as deliberately failing to vote at a company meeting on a topic not clearly resulting in a decrease in value of the person’s shares.
The result of failing to exercise the right must be to increase the value of:
- another person’s estate, or
- where the omission occurred on or after 11 April 1978, settled property in which no interest in possession exists.
If it is established that there was a right, and that the transferor by deliberately failing to exercise that right has diminished the value of their estate and increased that of another person (or settled property in which no interest in possession subsists) they are treated as having made a transfer of value (IHTA84/S3 (1)).
If the right subsisted for a period, the disposition is regarded as made at the last opportunity of exercising the right. The timing may be important in respect of valuation dates and the date for interest.
A further overriding condition is that the failure to exercise the right must be deliberate.
The Supreme Court, in the case of HMRC v Parry and others [2020] UKSC 35, dealt with two challenges that are frequently made against the application of IHTA84/S3(3).
Firstly the argument that the reduction in the value of the first person’s estate must be followed immediately by an increase in the second person’s estate was firmly rejected. In her judgment, Lady Black said, at 92:
‘I do not consider there is any mandate to import a temporal requirement into the subsection, requiring an immediate temporal link between the reduction in one estate and the increase in the other. There is a correlation of substance between the reduction and the increase, in that one results from the other, but they need not occur at precisely the same time.’
Secondly, the Supreme Court confirmed that there is no need to be able to identify the specific person whose estate is to be increased by the omission at the time the omission occurs. It is enough that some person’s estate will be increased. Lady Black said, at 95:
‘My view is reinforced by the fact that section 3(3) requires only that “another person’s estate” is increased. It is not concerned with the identity of the other person. The benefits that were generated by Mrs Staveley’s omission to draw her lifetime pension were undoubtedly going to increase “another person’s estate”, even if the scheme administrator had not exercised its discretion in favour of the sons, but instead chosen others from the list within the scheme rules.’
Interaction with other statutory provisions
In considering IHTA84/S3 (3), bear in mind the possible effects of IHTA84/S10 (1). This would cover such events as failure to take up a rights issue solely because of a shortage of ready cash, or failure to litigate a claim against a stranger purely to avoid the uncertainty and costs involved in a law suit.
Although S3(3) deems a disposition to have been made, it is then covered directly by S3(1) without the aid of S3(4). The exemptions in IHTA84/S19 to 22 therefore apply to the deemed disposition and are not excluded by IHTA84/S19(5), IHTA84/S20(3), IHTA84/S21(5) and IHTA84/S22(6).