11. Inheritance Tax Flashcards
What is inheritance tax?
A tax on the transfer of wealth
What is lifetime tax?
Tax charged on certain assets called chargeable lifetime transfers (CLT’s) made throughout life.
What can death tax be charged on?
- On the transfer of gifts made in the 7 years period
- On the value of assets transferred at the time of death
Who is chargeable to IHT?
If an individual is UK domicile or deemed UK domicile, they will be liable to IHT on their worldwide assets.
If the individual is not UK domiciled, they are liable to IHT on their assets located in the UK.
What transfers are exempt to IHT?
Transfers to a spouse or civil partner and charities and political parties.
What is the diminution in value principle?
The fall in wealth of the person making the gift.
What are the ways of valuing shares?
They will be valued at the lower of:
> the quarter up value
> average of the highest and lowest market bargains.
How do you calculate the quarter up value?
Lower quoted price + 1/4( higher quoted price - Lowe quoted price)
How do you calculate the average marked bargain value?
( highest marked bargain + lower marked bargain) /2
When is there no value of transfer?
If there is no gratuitous intent or if the payment is for the maintenance of the family.
What is a Potentially Exempt Transfer?
A lifetime transfer between individuals, unless is it a CLT or specifically exempt.
What are the characteristics of a PET?
- Never any lifetime tax to pay.
- The PET will only become chargeable to death tax if the donor dies within 7 years of the transfer.
- If the donor loves longer than 7 years, the PET is exempt.
What is a a Chargeable Lifetime Transfer?
A gift to a trust.
What is a trust?
Where a party is appointed as a trustee to look after the assets of the beneficiary.
When will a CLT be chargeable to IHT?
During its lifetime:
Lifetime tax is charged at 20%
- Use 20% if trustee pays tax (gift is gross)
- Use 20:80 if donor pays tax (gift is net)
Death tax is also payable if the donor pays within 7 years of the CLT
What is the small gift exemptions
Lifetime transfers up to £250 per donee per tax year to individual, can be any number of donees.
What is the marriage exemption?
- Up to £5,000 from a parent
- Up to £2,500 from a grandparent
- Up to £2,500 from one party of marriage to another
- Up to £1,000 by any other party
What is the annual exemption for lifetime transfers and what are it’s conditions?
£3,000
- It will always be used against the first first gift in the year.
- Should be used after all other exemptions.
- Can be carried forward for one year only.
What ‘normal expenditure’ is exempt?
- Normal expenditure out of income
- Typical or habitual payments over several years
- Made out of income instead of capital
- Doesn’t not affect the transfers of normal standard of living
What are the rates of lifetime transfer?
0% up to nil rate band
20% on excess
What is the nil rate band?
£325,000
What are the steps to follow when calculating lifetime tax?
1) Deal with all transfers in the tax year in chronological order
2) Ignore exempt transfers
3) Value the transfers
4) Deduct:
- marriage exemption
- annual exemptions (chronological order)
5) If the transfer is a PET, ignore it for now
6) Calculate any tax due on CLTs
What are the gross chargeable transfers?
A CLT will become part of the accumulated transfers and will have an impact on future calculations if any more gifts are made to the trusts in the next 7 years.
What is death tax payable on?
- Lifetime gifts made in the 7 years before death
- The death estate
