13.10 Estate Tax Flashcards
(21 cards)
What is inheritance tax (IHT)?
Inheritance Tax: A government tax imposed on chargeable lifetime transfers (CLT), potentially exempt transfers (PET) and transfers on death.
What is the rule with transfers of value?
All types of transfer made by an individual are subject to IHT unless exempt. This includes transfers made alive as well as on death.
The 3 types of transfers of value are CLTs, PETs and transfers on death.
What is the IHT liability for a chargeable lifetime transfer (CLT)?
Chargeable Lifetime Transfer (CLT)
A lifetime transfer that is not exempt or potentially exempt. These include gifts to trusts - gifts to a discretionary trust and interest in possession trust results in IHT being immediately payable.
CLTs are immediately chargeable. CLTs charged @ 20% IHT above nil-rate band or 40% reassessed tax liability if transferor dies within 7 years of transfer above nil-rate band.
What are the exceptions to a chargeable lifetime transfer (CLT)?
Exception - some special trusts are not chargeable transfers:
- Gifts to charitable trusts (exempt) or
- Gifts to bare trusts - trusts under which the beneficiaries
decide when the assets are distributed (PETs).
What is the IHT liability for a potentially exempt transfer (PET)?
Potentially Exempt Transfer (PET)
No tax is paid at the time a PET is made. A PET will become a chargeable transfer only if the donor dies within 7 years of the gift.
These are chargeable if they fail. Failed PETs charged @ 40% IHT above nil-rate band.
What is the IHT liability for transfers on death?
Transfers on death
At the point of death, the deceased is treated as having made a chargeable transfer equal to the net value of their assets at the date of death. Net value means the total value of all the assets less any debts or liabilities owed by the individual at the date of death. The personal representative pays tax on the death estate.
Death transfer charged @ 40% above nil-rate band (£325,000)
How is IHT calculated?
How IHT is assessed based on NRB:
£0 - £325,000: 0% rate (nil-rate band)
The amount above £325,000:
20% - CLTs
40% - death transfers, failed PETs and reassessed CLTs for transfers in the last 7 years
What are the main exemptions for IHT regarding lifetime transfers?
Exemptions to IHT:
Estates that fall within the IHT NRB (currently £325,000);
Gifts to UK charities
Small gifts allowance - up to £250
Lifetime gifts on marriage: £5k to a child, £2.5k to a grandchild, great grandchild, £1k to any other person
Normal expenditure out of income
Family maintenance
IMPORTANT: Annual exemption - £3000 on lifetime transfers plus previous year could be used (up to £6000)
Expenditure on the maintenance of an individual’s family or a gift made without gratuitous intent is not treated as a transfer of value for IHT.
List the full exemptions affecting IHT on lifetime transfers?
Exemptions for Lifetime Transfers:
-Gifts to UK charities
- Small gifts allowance - gifts up to £250
- Some lifetime gifts on marriage
- Normal expenditure out of income
- Family maintenance: maintenance payments made to a former spouse, child for education, elderly relative for care
- Annual exemption: £3000 annual exemption on lifetime transfers plus previous year if unused (could be up to £6000)
- PETs (potentially exempt transfers)
NOTE: PETs will give rise to an IHT charge if the donor dies within 7 years of making the gift. If there are more than 3 years between the date of PET and donor’s date of death, taper relief is given. Taper relief reduces the tax payable by a percentage
What is taper relief?
Taper Relief (Failed PETs and 40% CLTs only):
Transferor survives more than 3 years after the transfer - If there are more than 3 years between the date of PET and donor’s date of death, taper relief is given. Taper relief reduces the tax payable but does not reduce the amount of the transfers:
0 - 3 years: Nil 3 - 4 years: 20% 4 - 5 years: 40% 5 - 6 years: 60% 6 - 7 years: 80%
How is the individual’s estate assessed and how is this used when calculating IHT on the death estate?
An individual’s estate - Will comprise all the assets to which they are beneficially entitled at the date of death. The value of an asset at the date of death is its open market value.
What is the difference between IHT on the death estate and lifetime transfers?
You should know how to calculate IHT on the death estate and the differences to calculating death tax on lifetime transfer - there is no annual exemption to reduce the value of the chargeable death estate.
If no exemption applies, estates are taxed at the rate of 40% on the value transferred by a chargeable transfer.
What are the main reliefs for all lifetime and death transfers?
Exemptions and reliefs for all lifetime and death transfers:
1) Spouse exemption - Transfers to spouse / civil partner during life and following death (also transfers with NRB and RNRB)
2) Charity exemption - All transfers to charity are exempt from IHT. You deduct any amount that is given to charity from death estate (when left in a will). If amount given to charity is 10% or more of the value of the net death estate, IHT is 36%, not 40%.
3) Agricultural property relief (APR) - Available only for agricultural property that forms part of any transfer - 100% exemption
4) Quick succession relief - An individual’s estate had been increased by a chargeable transfer made to them in the 5 years before death
5) Business property relief (BPR) - Applies to qualifying business assets.
What is the residence nil rate band (RNRB)?
Residence Nil Rate Band (RNRB): Passing on a home to lineal descendants (not a spouse) - an additional residence NRB is available (£175,000) if the following requirements are met:
- Calculation of IHT on the death estate (it is not relevant to CLTs);
- The estate contains a qualifying residential interest (that is, a dwelling house which has at some point been used as the deceased’s private residence)
- That residence is closely inherited (that is, it is passing to lineal descendants such as children or grandchildren or the spouses of such descendants), and
- The residential interest passes either via a will or under the rules of intestacy
- Must be claimed by the deceased’s PRs within 2 years of death
How can the nil rate band be transferred?
Spouse receiving unused proportion of NRB - Transferable NRB (TNRB):
If an individual dies leaving some or all of their NRB unused, a claim can be made for the unused proportion to be transferred to their spouse. An additional, residence NRB is available provided the requirements are met.
What is an example of an anti-avoidance rule?
Anti-avoidance rules: These rules are in place, including the gifts with reservation of benefit rules (GROB - to prevent a donor from giving away an asset but continuing to derive some benefit) and the pre-owned asset tax rule
How is IHT paid?
Paying IHT - An individual or a personal representative may make a claim with HMRC to pay IHT by installments. The personal representative is also responsible for dealing with the deceased’s income tax and capital gains tax liabilities.
How can someone mitigate future IHT liabilities?
Individuals and married couples may mitigate future IHT liabilities in a number of ways, including:
Making lifetime gifts
Using annual exemptions
Using the transferable NRB, or
Investing in business or agricultural property
What is the difference between the taxable death estate and the succession estate?
The taxable death estate is different to the succession estate (covered in Wills).
Rule with death estate - All property the deceased was beneficially entitled to at the date of death is included in the death estate (which is then taxed). This includes property outside the UK, property held jointly or as tenants in common. Share of property held by the deceased is also added to the death estate.
Exception - The below are not included in the death estate:
1) Remainder interests in a life interest trust if the remainderman dies before the life tenant;
2) Insurance policies under a trust;
3) Discretionary pension schemes
How do PRs deal with any capital gains tax (CGT) payable on the estate’s assets?
Capital Gains Tax (CGT) - If any gain is made on the SALE of estate assets.
- The base cost for such sales is the probate (market) value of the asset received at the time of death.
- The PRs pay a flat rate of 18% (24%) for residential property) and can deduct costs and the AE (like for standard CGT calculations).
- This CGT is payable out of the estate.
- No CGT is paid on a transfer of an asset to a beneficiary.
- A beneficiary may have to pay CGT if they sell an asset they have received from the estate and made a gain.
How do PRs deal with any income tax (IT) payable on the estate’s assets?
Income Tax (IT) - Payable on any income received by the estate during administration.
Any property that was rented out or income from a residuary fund.
NOTE: No income tax is payable if the income earned is less than £100 and is only from interest from savings accounts.
- PRs are liable for the income tax.
- They pay 7.5% on dividend income, 20% on all other income.
- Relief can be claimed for any interest payments made on loans (e.g. one taken out to pay IHT).
