Mark McLaughlin highlights the proposed inheritance tax exemption for transfers between siblings in certain circumstances.
New inheritance tax (IHT) exemptions are rare but welcome news. A new rule to make transfers between siblings exempt in certain circumstances is no exception. On 7 July 2022, the government published new IHT legislation (Inheritance Tax Act 1984 (Amendment) (Siblings) Bill).
This Bill (which amends IHTA 1984) makes transfers between siblings exempt in certain circumstances. A ‘sibling’ for these purposes means a brother, sister, half-brother or half-sister of the transferor. The sibling exemption extends to England and Wales, Scotland and Northern Ireland. This provision has not become law at the time of writing but will be a useful exemption when it does.
What’s the reasoning?
There is already an IHT exemption for transfers between spouses or civil partners. It is generally well-known among taxpayers and IHT practitioners alike; the same can probably be said about the transferable nil rate band facility for spouses and civil partners. However, these do not extend to siblings, even if they share the same household.
For example, in Burden & Burden v United Kingdom [2008] STC 1305, two unmarried sisters lived together for many years in a house which they owned jointly. Each had made a will leaving her interest in the property to the other. The sisters applied to the European Court of Human Rights (ECHR), complaining that an IHT liability could arise on the first sister to die, whereas the liability would not arise for married couples or civil partners due to the spouse or civil partner exemption. The sisters argued that this amounted to a violation of their human rights. Unfortunately, the ECHR held there was no discrimination and no violation of the sisters’ convention rights.
The government eventually decided to introduce an IHT exemption, which applies to certain transfers between siblings (but does not extend to cohabiting couples, as some might have hoped). The Inheritance Tax Act 1984 (Amendment) (Siblings) Bill if enacted introduces a new section 18A (‘Transfers between siblings’) into IHTA 1984. The proposed legislation states that a transfer of value is exempt to the extent that it is attributable to property which becomes comprised in the sibling’s estate or otherwise to the extent that the estate is increased (e.g., where a debt between siblings is written off).
However, the siblings exemption is limited in its application by two conditions, both of which must be satisfied.
Strings attached
The first condition is that the recipient sibling must have ordinarily resided in the same household as the transferor for a continuous period of seven years ending with the date of the transfer. This condition seems to be aimed at benefiting siblings such as the Burden sisters in the above case. This cohabitation requirement is a high hurdle to jump, which significantly restricts the scope of the exemption.
The second condition to be met for the exemption to apply is that the recipient sibling must have attained the age of 30 at the date of transfer. The reason for this age requirement is not immediately apparent. However, it is possibly intended to ensure that the exemption applies to siblings who have made a lifestyle choice to live together, as opposed to (for example) younger siblings who are still living at home with their parents and have not yet acquired a property of their own.
Practical tip
As mentioned, the new exemption for siblings has not become law at the time of writing. The Act comes into force at the end of the two-month period beginning with the day on which it is passed. In the meantime, the relevant legislation is subject to possible amendment during its passage through Parliament. So, check the legislation when it becomes law, and plan any suitable transfers between siblings carefully with a view to securing the exemption.
