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SQE 1 - Taxation > 2b. Inheritance Tax - Death Estate, Post-Mortem Reliefs, Anti-Avoidance, and Payment of IHT > Flashcards

2b. Inheritance Tax - Death Estate, Post-Mortem Reliefs, Anti-Avoidance, and Payment of IHT Flashcards

1
Q

At the point of death, what is the deceased deemed to have made a chargeable transfer of?

A

The net value of their assets at the date of death

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2
Q

What is the net value of assets?

A

Total value of the assets owed by the deceased, less funeral expenses and any debt or liabilities owed by the deceased, but not probate costs

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3
Q

Is the annual exemption available to reduce the value of the chargeable death estate?

A

No

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4
Q

What are the three steps for calculating tax on death?

A
  1. Start with NRB for year of death
  2. Reduce NRB by chargeable transfers within seven years of death
  3. Tax the excess at 40%
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5
Q

What gifts are exempt from IHT on death?

A
  1. Gifts to spouse/civil partner
  2. Gifts to UK/EEA charities
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6
Q

What is the exception to the spouse exemption?

A

If the deceased was UK-domiciled but spouse is not, the limit is the NRB or £325,000

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7
Q

What are two exceptions to the general rule that the value of an asset is its market value at the date of death?

A
  1. Quoted shares
  2. Jointly owed assets
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8
Q

How are quoted shares valued?

A

Per the official list published by the Stock Exchange at the date of death

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9
Q

How are jointly owned assets valued?

A

Under the related property rules already discussed, i.e. we take a higher valuation if the property is worth more combined with property already owed by the recipient

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10
Q

In addition to non-UK assets owned by non-UK domiciled individuals, what are two types of interests that are considered excluded property?

A
  1. Reversionary interests under a life interest trust
  2. Interests in a discretionary trust
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11
Q

What are three liabilities that can be deducted from the estate, and what is one that cannot be?

A

Can deduct:
1. Mortgages
2. Income tax owed
3. Reasonable funeral expenses

Cannot deduct:
Probate costs

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12
Q

What % of net estate or baseline amount must be given to charity to benefit from a lower IHT rate, and what is that rate?

A

10% of estate or baseline amount must be given to charity for the IHT rate to be reduced to 36% from 40%

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13
Q

For the purposes of the charity rate reduction, what is the baseline amount?

A

Value of estate chargeable to IHT after deducting all available reliefs, exemptions, and the available NRB, but excluding the actual portion given to charity

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14
Q

What is the transferable nature of the NRB?

A

If an individual dies leaving some or all of their NRB, a claim can be made for the unused amount to be transferred to their spouse, who will then have an uplifted NRB

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15
Q

How is the uplifted NRB calculated?

A

Uplift the spouse’s current NRB at its current rate by the deceased’s unused % of their NRB at the rate at the time

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16
Q

What is one thing an uplifted NRB cannot be used for?

A

Lifetime tax on CLTs

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17
Q

How is an uplifted NRB claimed in practice?

A

On the death of the first spouse, it is recorded as part of the second spouse’s NRB. Upon the second spouse’s death, their executors make the claim

This is why it cannot be used for spouse 2’s CLTs

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18
Q

Can an individual claim an uplifted NRB from more than one deceased spouse?

A

Yes, but the uplift is capped at 100% on top of their own NRB (i.e. double their NRB)

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19
Q

What two criteria must be satisfied for the residence nil-rate band (RNRB) to be available in addition to the regular NRB?

A
  1. Estate includes a home that was used as the deceased’s private residence at some point, and
  2. Home or its sale proceeds are left to lineal descendants or spouses of such
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20
Q

What is the maximum relief available under the RNRB?

A

£175,000

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21
Q

To avail of the RNRB, is it necessary for the descendants to occupy the property after death?

A

No

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22
Q

Does the RNRB apply to lifetime transfers?

A

No, to the death estate only

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23
Q

At what total estate net valuation does the RNRB begin to taper away, what is the rate of taper, and therefore at what total estate valuation is the RNRB effectively lost?

A

£2 million.

£1 taper for every £2 over.

Effectively lost at £2.35m.

24
Q

What is net valuation for the purposes of RNRB taper?

A

Assets minus liabilities, but before deducting reliefs

25
Q

What are the two main reasons why RNRB would be left over to uplift that of the deceased’s spouse?

A
  1. First spouse did not have a qualifying home
  2. First spouse did not have or leave home to lineal descendants
26
Q

Can an individual claim an uplifted RNRB from more than one deceased spouse?

A

Yes, but like the NRB, the uplift is capped at 100% on top of their own RNRB (i.e. double their RNRB)

27
Q

What is the downsizing uplift in the context of RNRB?

A

Where a residence valued in excess of the RNRB is sold and replaced with a new residence which is valued at less than the RNRB or is gifted in a way which some of the RNRB will be unused, an uplift can be claimed reflecting the amount of RNRB which could have been used if it was the more expensive property that was gifted

28
Q

When is quick succession relief available?

A

When an individual’s estate increased due to a chargeable transfer made to them in the five years before their death

29
Q

Under quick succession relief, by what % is the relief reduced for each year between the donor’s death and the recipient’s death?

A

20%

30
Q

To apply for quick succession relief, does the deceased recipient still have to own the property at the date of death?

A

No

31
Q

In what three circumstances can a claim be made to substitute a lower value in the death for assets which have been sold by personal representatives after death?

A
  1. Quoted shares (sold at a loss within 12 months)
  2. Land and buildings (sold at a loss within 3 years)
  3. Woodlands relief
32
Q

When is the lower substitute value available in the context of quoted shares?

A

Where PRs sell quoted shares at a loss within 12 months of the date of death

33
Q

When is the lower substitute value available in the context of land and buildings?

A

Where PRs sell land or buildings at a loss (pooled if multiple sales) within three years of the date of death

34
Q

In the context of substituting a lower value for land and buildings, how are profits and losses in the fourth year treated?

A

Losses can count toward the relief. Profits are ignored.

35
Q

In what circumstance might woodlands relief be available?

A

Deceased had land that was not eligible for agricultural or business relief, but on which trees and underwood are growing

36
Q

To qualify for woodlands relief, how long must the deceased have had a beneficial entitlement to the land?

A

Five years prior to death

37
Q

How does woodlands relief operate?

A

It excludes the value of the woodlands from the estate

38
Q

Whilst woodlands relief applies to trees, what does it not apply to?

A

The value of the land upon which trees are growing

39
Q

What is a gift with reservation of benefit?

A

Where an individual gives away an asset but continues to be able to benefit from that asset, it is still treated as part of the donor’s estate at the date of death

40
Q

What action can the donor take to negate the rules on gifts with reservation of benefit in the context of giving away a house but continuing to live in it?

A

Pay market rent to the recipient

41
Q

How can a donor who would otherwise be deemed to have made a gift with reservation of benefit avoid the rule?

A

Release the benefit, e.g. move out of the house, before death

42
Q

Where a benefit is released before death, how does HMRC treat the release?

A

As a PET valued at the date of release

43
Q

In the context of gifts with reservation of benefit, when will Pre-Owned Asset Tax apply?

A

When the rule has been avoided by, e.g., selling a house, making a cash gift which is used by the donee to purchase a property in which the donor lives rent free

44
Q

What type of tax charge is levied under Pre-Owed Asset Tax an what are the two requirements for it to apply?

A

Income tax charge levied on benefits enjoyed by former property owner if:

  1. Former owner benefits directly or indirectly from an asset they previous owned, and
  2. Transfer is not otherwise within the gifts with reservation of benefit rules
45
Q

When is IHT payable on a CLT?

A

Later of:

  1. Six months from the end of the month in which the CLT was made, or
  2. 30 April after the tax year in which it was made
46
Q

Who has primary liability to pay IHT on a CLT, and who can HMRC pursue if this party fails to pay?

A

Donor. HMRC can pursue recipients, or even beneficiaries in extreme cases.

47
Q

When is additional death tax is payable on a CLT due, and who is liable to pay it and why?

A

Six months after the end of the month in which the death occurred. Trustees are liable as the donor is dead.

48
Q

When is death tax on a PET which has become chargeable due, and who is liable to pay it?

A

Six months after the end of the month in which the death occurred. Recipient is liable.

49
Q

In the case of both CLTs and PETs, who may become liable if the tax remains unpaid 12 months after the date of death?

A

The PRs

50
Q

When is IHT due for a transfer on death?

A

Six months after the end of the month in which the death occurred

51
Q

What is the liability and what is the burden with regard to tax?

A

Liability: who must pay tax
Burden: the source of the funds used to pay tax

52
Q

Who is liable for and who has the burden of IHT in the case of freehold property?

A

Liable: PRs
Burden: Residuary legatee, if will silent

53
Q

Who is liable for and who has the burden of IHT in the case of settled property in which the deceased had an interest?

A

Liable: Trustees
Burden: Trust assets

54
Q

Who is primarily liable for tax attributable to property subject to a gift with reservation of benefit?

A

Donee. PRs liable if not paid within 12 months.

55
Q

Who is liable for tax on property passing outside a will or intestacy and who ultimately bears the burden?

A

PRs liable. Beneficiaries bear the burden.

56
Q

If IHT is agreed to be paid in installments, how many annual installments must be paid and what is the due date for the first one?

A

10 installments. First one due on the normal tax due date.

57
Q

Why is it tax efficient to make lifetime gifts of appreciating assets?

A

Because for IHT purposes, it is the value at the date of transfer, not death, that applies

SQE 1 - Taxation (8 decks)

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