3. Inheritance Tax Flashcards

Question

What are the two bands for IHT tax rates? | IHT Step 4: Calculate tax at the appropriate rate

Answer 1

1. Nil Rate Band - £325,000 2. Residence NRB - £175,000

Answer 2

* available for all transfers of value * tax is charged at 0% on the first £325k

Answer 3

* for deaths after 6 april 2017 in addition to NRB * available only on transfers on death where there is a 'qualifying residential interest' + 'closely inherited'. * tax is charged at 0% on the first £175k

Answer 4

an interest in a dwelling house + at any time been the deceased’s residence + forms part of the deceased’s estate.

Answer 5

* lineal descendant of the deceased outright or on certain types of trust. Like children, step-children, foster, adopted and deceased appointed as their guardian. * current spouse or civil partner of the deceased’s lineal descendants * widow, widower or surviving civil partner of a lineal descendant who predeceased the deceased (as long as not remarried before deceased's death)

Answer 6

RNRB is reduced by £1 for every £2 over the £2 million threshold.

Answer 7

Any unused NRB/RNRB may be claimed by a surviving spouse, even if the first spouse died before 6 April 2017.

Answer 8

downsizing allowance allows RNRB claims by personal representatives if the deceased downsized or sold property after July 8, 2015, as long as the property qualifies for RNRB and equivalent assets go to lineal descendants. RNRB useful if i live in a home worth 500k for example and sell it and live in a 150k home because i can still use the 25k

Answer 9

**Death:** 40% (smaller cases 36%) **LCTs:** 20%

Answer 10

if an individual gives 10% of CE to charity they will be taxed at 36% rather than 40%.

Answer 11

If the deceased died on or after 9 October 2007 having survived a spouse or civil partner, the NRB in force at the date of death of the survivor is increased by whatever percentage of the NRB of the first to die was unused by them (subject to a maximum increase of 100%).

Answer 12

* Solely used for NRB. * Calculating how much of the NRB has been 'used up' by looking at all chargeablt transfer duringthe previous 7 years to death. Examples: 1. no CT, NRB is fully available 2. 1 CT of £75k, NRB available is £325k less £75k = £250k

Answer 13

Each transfer has its own cumulation period, and when a new transfer is made, the cumulative total must be recalculated.

Answer 14

* not avavaible for life time transfers * available in full on death, subject to any adjustments in relation to estates over £2 million.

Answer 15

* property under will/intestacy * property with beneficial entitlement but not under will/intestacy * property included because of special statutory provisions

Answer 16

1. 'Certain trust property' 2. property given away by the deceased during lifetime but which is 'subject to reservation' at the time of death

Answer 17

where a beneficiary who is entitled to all the income from a trust dies, the trust fund is taxed as if it were part of the beneficiary’s estate. known as 'qualifying interest in possession'

Answer 18

IPDI is a qualifying interest in possession arising on the death of the settlor under their will or intestacy.

Answer 19

designed to prevent people avoiding tax by parting with ownership of property but continuing to enjoy the benefit.

Answer 20

where the deceased gave away property during their lifetime but: * did not transfer ‘possession and enjoyment’ of the property to the donee OR * was not entirely excluded from enjoying the property

Answer 21

If property is subject to a reservation at the time of the donor’s death, the donor is treated as being ‘beneficially entitled’ to the property.

Answer 22

* property in which the deceased did not have or deemed to have a beneficially interest in immediately before death.

Answer 23

life policies written in trust + discretionary pension + remainder interest + discretionary trust assets.

Answer 24

the value immediately before death of every asset forming part of the estate must be assessed and reported to HMRC.

Answer 25

10% for commercial property and 15% for residential property

Answer 26

where the death causes the value of an asset in the estate to increase or decrease, that change in value should be taken into account

Answer 27

* Take one-quarter of the difference between the lower and higher price and add it to the lower price. **Example:** if at the date of death, the quoted price per share is 102p/106p, the value of each share for IHT is 103p.

Answer 28

Yes, provided that they were incurred for money or money's worth. Examples: funeral expenses, bills, and outstanding income tax.

Answer 29

* **Limitation:** If the transferor is domiciled in the UK but the transferee is not, the level of the exemption is limited to £325,000. * **Solution:** the transferee can elect to be treated as UK-domiciled for IHT purposes and so receive the full exemption.

Answer 30

* Spouse or civil partner and charity exemptions are applied before reliefs * ‘Lifetime only’ exemptions: apply reliefs before exemptions since they can reduce the value of only part of a transfer.

Answer 31

lifetime chargeable transfer made on or after 22 March 2006 into any trust (other than a disabled trust) OR to a discretionary trust or company (whether made before, on or after 22 March 2006)

Answer 32

It means the transfer becomes exempt if the transferor survives seven years; otherwise, it becomes chargeable upon their death, with no immediate action needed at the time of the transfer.

Answer 33

small gifts exemption

Answer 34

Potentially exempt transfers - gifts to individuals.

Answer 35

* 0% on first £325K - NRB * 20% on balance * 40% if re-charged.

Answer 36

PET fails and will become chargeable @40% only if the transferor dies within seven years of making the transfer.

Answer 37

* reduces any tax payable on the PET * available if the transferor survives for MORE than three years after the transfer

Answer 38

Taper relief reduces the tax on PETs based on the time elapsed before the transferor's death. * Transfers within three to four years before death are subject to 80% of the full death charge * four to five years to 60%, * five to six years to 40% * and six to seven years to 20% of the death charge. | reduces IHT due by 20% if death 3-4yrs ago + add 20% every 1yr after.

Answer 39

If a transferor dies within seven years of making LCT, the IHT payable by trustees may increase due to application of the full death rate of IHT and potential chargeable PETs, which reduce the available NRB for the LCT.

Answer 40

Each chargeable or rechargeable transfer has its own cumulation period. This means that a taxpayer who makes a LCT may need to survive for up to 14 years before it no longer impacts their inheritance tax liabilities.

Answer 41

As long as IHT on the LCT has been recalculated + more than three years have elapsed between the transfer and the subsequent death, **tapering relief applies to reduce the recalculated tax.**

Answer 42

**Credit given for any IHT paid on the LCT at the time it was made.** But, if the recalculated bill is lower than the original amount paid (which may occur if tapering relief is available) no tax is refunded.

Answer 43

**Liability:** HMRC collects the tax from representatives and trustees. Those who receive the property share the liability but often receive it after the tax has been paid. **Burden:** The burden of tax can be altered by the testator in the will, but the statutory rules on liability are fixed and cannot be changed

Answer 44

The average rate of tax applicable to each item of property in the estate - usually 40%

Answer 45

* distributed proportionally based on the value of the assets * done by calculating the estate rate *Alternatively* * the tax on a specific property can be determined by applying the proportion of the total tax bill to the total chargeable estate.

Answer 46

* **PRs**: tax on non-settled estate * **Trustees:** tax on settled estate

Answer 47

* transferor if alive + transferee if deceased * tranferor pays more as loss is increased by amount paid (better for trustees to pay IHT rather than transferee).

Answer 48

* The **recipient of the gift is initially responsible** for paying the tax on the property. * If the **tax remains unpaid 12 months** after the end of the month of death, **PRs become liable** for the tax.

Answer 49

* transferor decides * if will is silent - IHT on property to PRs is treated as a testamentary expense, while IHT on property held as beneficial joint tenants is the responsibility of the surviving joint tenant.

Answer 50

* IHT due six months after the month of death. * An instalment option available (land+business/interest+shares w/ control + unquotes hares w/o control) * Interest on late payments. * Sale - all outstanding tax and interest becomes payable.

Answer 51

1. They represent at least 10% of the company's shares and are worth over £20,000. 2. Paying the tax in one sum would cause undue hardship according to HMRC. 3. The IHT on these shares, combined with other instalment option property, makes up at least 20% of the total IHT on the estate.

Answer 52

* IHT due six months after the month of death. * Instalment option may apply.

Answer 53

* IHT due on LCTs made after April 5th but before October 1st is payable on April 30th of the following year. * IHT on LCTs made outside of these dates is due six months after the month in which the LCT is made. * If the transferor dies within seven years, additional IHT is due six months after the month of death. * Instalment option may be available.

Answer 54

1. Disclosure of Tax Avoidance Schemes (DOTAS) 2. General Anti-Avoidance Rule (GAAR)

Answer 55

DOTAS is a regulation that mandates the early disclosure of certain tax avoidance schemes to HMRC.

Answer 56

Early disclosure allows HMRC to assess the scheme's effectiveness and take countermeasures to prevent tax avoidance.

Answer 57

A 'notifiable arrangement' must have its primary purpose aimed at gaining specific Inheritance Tax (IHT)-related advantages. It should also involve **contrived (deliberate) or abnormal steps necessary for obtaining a tax advantage.**

Answer 58

GAAR is a rule that applies to Inheritance Tax (IHT) and **allows HMRC to address abusive tax arrangements.**

Answer 59

An arrangement qualifies as a 'tax arrangement' under GAAR **if it is reasonable to conclude that obtaining a tax advantage was a primary purpose.**

Answer 60

An arrangement is considered 'abusive' **if it cannot reasonably be seen as a reasonable course of action, subject to a double reasonableness test, with the burden of proof on HMRC.**

Answer 61

HMRC can **counteract the tax advantage and potentially impose penalties on the taxpayer.**

Answer 62

Gross: is the the value of all transfers on death Net: is the Gross LESS debts and funeral expenses

Answer 63

Company must be a trading company not an investment company.

Answer 64

unquoted - Ltd (private company) quoted - Plc (public company)

Answer 65

3 years and above from death

Answer 66

The taxable value of the estate once all exemptions and reliefs have been applied.

Answer 67

Applied to the total value of IHT payable for each separate transfer of value.

Answer 68

value transferred + exemptions and relief + NRB applicable + tax payable + possible taper THEN deduct original amount paid (when it was first charged).

Answer 69

Transfers of value amounts that exceed £325k are subject to a 40% tax rate. However, 36% applies if at least 10% of the net estate goes to charity.

Answer 70

Transferors normal expenditure Made out of transferors income After such payments transferor left with sufficient income for usual standard or living Example: parent regularly giving child payment to help with uni living expenses

Answer 71

Applies to charities obviously but also this similar exception applies to national bodies and bodies providing public benefit such as museums, art galleries and political parties.

Answer 72

1. Transferor must have owner the agricultural land for two years prior to transfer 2. Land owned by transferor for seven years prior to transfer and was occupied by someone throughout for the purpose of agriculture