22. TC - IHT: death estate and valuation Flashcards
(42 cards)
When does the diminution in value principle apply?
Applies if only part of an asset is transferred in a lifetime transfer and the other part is retained by the transferor
How do you calculate thhe diminution in value?
The transfer is valued at the transferor’s loss in value as a result of the transfer
Value of estate before gift X
Value of estate after gift (X)
= Diminution in value X
For CGT the proceeds would be the MV of the parts transferred, not the value used for IHT
TYU1a Mr T owns 75% of A- team Ltd. He gives a 20% shareholding to his son during his lifetime
The values agreed with HMRc are:
75% holding £150k
55% holding £80k
20% holding £35k
Show the value of the shares transferred for the purposes of IHT
Value for IHT
Value of estate before: 75% holding £150k
Value of estate after: 55% £(80k)
Diminution in value / transfer value = £70,000
TYU1b Mr T owns 75% of A- team Ltd. He gives a 20% shareholding to his son during his lifetime
The values agreed with HMRc are:
75% holding £150k
55% holding £80k
20% holding £35k
Show the value of the shares transferred for the purposes of CGT
Proceeds = MV = £35,000
What impact does the related property rule have on IHT?
It prevents taxpayers from avoiding IHT by splitting the ownership of assets (e.g. land or shares) to reduce the value of their estates
What is the related property rule?
Where similar property is held by the following, the value of the related property is calculated as a proportion of the total property held by both parties
- estate of the transferor’s spouse/ civil partner
- A charity or political party which received the asset from the transferor (or their spouse/ CP) and held the asset within the last 5 years
TYU2a: Mr Baracus gifts the following shares to his daughter
Peck plc 10,000 shares
Quoted at 280p - 296p
Recorded bargains 282p, 286p, 294p
Calc the value of the shares transferred for the purposes of IHT
Lower of
1/4 up
280p + 1/4 x (296p - 280p) = £284p
Average of highest and lowest marked bargain (282p + 294p)/2 = 288p Transfer value (10,000 shares @ 284p) £28,400
TYU2b: Mr Baracus gifts the following shares to his daughter
Peck plc 10,000 shares
Quoted at 280p - 296p
Recorded bargains 282p, 286p, 294p
Calc the value of the shares transferred for the purposes of CGT
280p + 1/2 (296p - 280p) = 288p
Proceeds (10,000 shares @ 288p)
What does the related property rule apply to?
Applies to IHT
NOT to CGT
What does the related property rule NOT apply to?
Applies to IHT
NOT to CGT
How is the related property value calculated for shares?
For shares, the proportion is calculated by the number of shares, not the value of the SH
Give some examples of valuation rules
Related property rules
Jointly owned property rule
Unit trusts rules
Life assurance policies
Describe the jointly owned property
Where property is owned jointly and it is not possible to dispose of one indie’s interests freely, a discount between 5-15% may be allowed from the full value of the interest
Discount doesn’t apply where where related property is held
Describe the unit trusts valuation rule
Value units in a unit trusts at their bid price (lowest price)
Describe the life assurance policies
- If the policy relates to the indivs own life, including the proceeds (not the MV) of the policy in the death estate calc
- If the policy is held in trust don’t include it in death estate: no IHT will be due on the proceeds
- If the policy relates to someone else’s life include the MV of the policy in the death estate calc
TYU4: Rainbow Ltd has issued capital of 20,000 £1 shares.
Jeff owned 14,000 shares
his civil partner owned 2,000 shares
Zippy died leaving his SH to his friend Bungle
The following valued have been agreed
2,000 shares £4,500
16,000 shares £80,000
Show the value of Zippy’s shares for IHT purposes
Zippy
Valuation with related property
= 2,000/ (2,000 + 14,000) x £80,000 = £10,000
Valuation ignoring related property
2,000 shares £4,500
Therefore the related property value of £10,000 applies
Give some examples of debts and expenses that can be deducted in the computation of the death estate
- Debts incurred prior to death (e.g. credit card bills for items bought prior to death), other than gambling debts
- Taxes imposed by law (e.g. IT/CGT)
- Unpaid debts only if the remain unpaid for a commercial reason and not as part of an arrangement to obtain a tax adv
Where a debt is charged on specific property (e.g. a mortgage) the debt is deductible primarily from the property on which it is charged
What is quick succession relief?
QSR
It is a relief that is only available on the death estate
What is quick succession relief?
QSR
It is a relief that is only available on the death estate
Describe Stage 3
Calculating death tax (gifts 7 ears pre death and death estate only)
Along the top PET , CLT , Death estate
Down the side Gross chargeable transfer X Fall in value relief (X) Residence nil rate band available (X) Nil rate band available (X)
= Taxable amount
Death tax at 40% X Taper percentage % Taered amount due X Lifetime tax paid (X) Quick succession relief (X)
Death tax payable (X)
What impact does QSR have?
It reduces the IHT payable in the death estate if
- Property has been acquired by the deceased in 5 years before death AND
- There was a charge to IHT on the initial transfer
When does QSR still apply?
Still applies where the asset is no longer held at date of death by the deceased
What is the calc for QSR
QSR = tax paid on first transfer x (net transfer/gross transfer) x relevant %
Net transfer = amount received after IHT
Gross transfer = amount chargeable to IHT
Relevant % depends on time between first transfer and date of death
How do you know which % to use for relevant % for QSR?
Relevant % depends on time between first transfer and date of death
Years between transfers - % applied 0-1 yrs 100% 1-2 yrs 80% 2-3 yrs 60% 3-4 yrs 40% 4-5 yrs 20%
