Chapter 7: Lifetime transfer IH Flashcards
(113 cards)
1
Q
A
2
Q
What does IHT stand for?
A
Inheritance Tax
3
Q
What are the two separate calculations required for IHT on lifetime transfers?
A
- Tax due on immediately chargeable lifetime transfers (LCTs only)
- Tax due as a result of the transferor dying within seven years of making a lifetime transfer (LCTs and failed PETs)
4
Q
Define Potentially Exempt Transfer (PET)
A
A lifetime transfer of value to another individual that becomes chargeable if the transferor does not survive for seven years after making the transfer.
5
Q
What happens to a PET if the transferor dies within seven years?
A
It fails and becomes a chargeable transfer subject to IHT.
6
Q
What is the tax treatment of a Lifetime Chargeable Transfer (LCT)?
A
- An LCT is a chargeable transfer when made
- IHT is payable at the lifetime rate of 20%
- No further tax if the transferor survives 7 years
- If the transferor dies within 7 years, it is reassessed at the death rate.
7
Q
What is the lifetime rate of IHT for an LCT?
A
20%
8
Q
What is the death rate of IHT?
A
40%
9
Q
List the steps to calculate IHT on lifetime transfers.
A
- Step A: Calculate cumulative total
- Step B: Identify value transferred
- Step C: Apply exemptions and reliefs
- Step D: Apply basic NRB and calculate tax
- Step E: Apply taper relief
- Step F: Give credit for tax paid in lifetime
10
Q
What is the nil rate band (NRB) fixed at since April 2009?
A
£325,000
11
Q
What is a ‘transfer of value’?
A
A disposition resulting in an immediate decrease in the value of the individual’s estate.
12
Q
What types of exemptions and reliefs can be applied when calculating IHT on lifetime transfers?
A
- Spouse exemption
- Charity exemption
- Family maintenance exemption
- Annual exemption
- Small gifts allowance
- Normal expenditure from income
- Marriage exemption
- Business property relief
- Agricultural property relief
- Taper relief
13
Q
Fill in the blank: An LCT is a chargeable transfer when it is made, and IHT is payable on the chargeable value of the LCT at the lifetime rate of _______.
A
20%
14
Q
What happens if a PET is reassessed after the transferor’s death?
A
It is taxed at the death rate of 40% and may require taper relief.
15
Q
What does ‘taper relief’ apply to?
A
Transfers made 3-7 years before the death.
16
Q
True or False: The residence NRB applies to lifetime transfers.
A
False
17
Q
What is meant by ‘grossing up’ in the context of IHT?
A
Increasing the value of a gift to account for the IHT paid in addition to the gift itself.
18
Q
What is the effect of lifetime transfers on the death estate?
A
They can affect the total IHT payable when an individual dies.
19
Q
What is the cumulative total relevant to lifetime transfers?
A
The sum of all chargeable transfers made in the 7 years prior to the transfer.
20
Q
How does the timing of PETs and LCTs affect IHT payable?
A
It affects both the amount of IHT on the transfers themselves and the cumulative total on death.
21
Q
What is the IHT payable on a failed PET after the transferor’s death?
A
It is reassessed at the death rate of 40%.
22
Q
What is the chargeable value of a transfer after applying exemptions?
A
The value of the transfer minus the total value of exemptions.
23
Q
What must be done if tax was paid on an LCT during the transferor’s lifetime?
A
Credit the tax paid against the IHT due after reassessment.
24
Q
What is the purpose of applying exemptions and reliefs in the IHT calculation?
A
To reduce the chargeable value of the transfer.
25
What is an example of a transaction that may count as a transfer of value?
Selling a house to a family member for less than its market value.
26
How is the chargeable value calculated if a wedding gift of £12,000 has exemptions applied?
Chargeable value = £12,000 - £11,000 = £1,000
27
What is the chargeable value of a Potentially Exempt Transfer (PET) that fails if made 10 years before death?
£200,000
## Footnote
A PET is not subject to IHT if the transferor survives for more than 7 years after the gift is made.
28
What is the tax rate for a death estate value above the Nil Rate Band (NRB)?
40%
## Footnote
The NRB is the threshold below which no IHT is charged.
29
How is the IHT calculated on a death estate worth £500,000 when the NRB is £325,000?
£70,000
## Footnote
Calculation: (£500,000 - £325,000) x 40% = £70,000.
30
What happens to the NRB when a Lifetime Chargeable Transfer (LCT) is made within 7 years of death?
It is reduced by the chargeable value of the LCT
## Footnote
This affects the amount of NRB available for the death estate.
31
True or False: A PET becomes chargeable to IHT if the transferor dies within 7 years of making the gift.
True
## Footnote
A PET is not initially chargeable but can become chargeable if the donor dies within 7 years.
32
What is Taper Relief?
A reduction in IHT payable on lifetime transfers if the transferor survives 3-7 years after the transfer
## Footnote
It applies to chargeable transfers that are reassessed after the transferor's death.
33
Fill in the blank: LCTs are lifetime transfers into a _______.
trust
## Footnote
LCTs are subject to immediate IHT charges and can be reassessed if the transferor dies within 7 years.
34
Who is primarily liable for paying IHT on a failed PET?
The donee (recipient of the gift)
## Footnote
If the donee does not pay, the personal representatives of the deceased become liable.
35
What is the total tax payable on a death estate of £500,000 with a chargeable LCT and PET made within 7 years?
£200,000
## Footnote
This is the result of no NRB being available due to the LCT.
36
What is the effect of a lifetime transfer on the total IHT due at death?
It contributes towards the cumulative total on the date of death
## Footnote
This can affect the calculation of the NRB and the overall tax liability.
37
What assets are excluded from the succession estate?
* Joint tenant property
* Gifts with reservation of benefit (GROB)
## Footnote
These assets pass outside the estate and are not subject to the terms of the will.
38
What is the general rule regarding who pays IHT on the free estate?
The personal representatives (PRs) of the deceased
## Footnote
IHT is generally paid from the residue of the estate unless stated otherwise in the will.
39
Fill in the blank: The general rule is that gifts in a will are deemed to be given 'free of ______.'
tax
## Footnote
This means the IHT is typically paid from the residue of the estate.
40
How is the tax on a joint tenant property treated in terms of IHT?
It passes outside of the free estate by survivorship
## Footnote
The value of the joint tenant property is taxed differently than the assets in the free estate.
41
What happens if the donee of a failed PET does not pay the IHT due?
The personal representatives of the deceased become liable
## Footnote
They must use assets within the death estate to cover the IHT charge.
42
What happens to the tax burden if the estate funds are used to pay IHT?
The residuary beneficiaries effectively bear the burden
## Footnote
This occurs because they receive a smaller inheritance.
43
What is the general rule regarding inheritance tax (IHT) and residue?
Tax is payable from residue and Charlie receives £100 in both cases.
44
What happens to gifts within a will regarding IHT?
Gifts are paid subject to a deduction of the IHT attributable to them.
45
What can a testator direct regarding the burden of IHT?
The testator can direct that the residue bears the burden of IHT due in respect of assets outside of the free estate.
46
What is meant by contrary intention in the context of a will?
The testator's intention to exonerate or burden parts of their estate is determined as a matter of construction of the will's terms.
47
Is there prescribed wording for expressing contrary intention in a will?
No, there is no prescribed wording.
48
How can a testator indicate that gifts are subject to inheritance tax?
It is common to draft all gifts expressly 'subject to' or 'free of' inheritance tax.
49
What must be clear in a will regarding the incidence of IHT?
Clear words must be used to indicate how IHT is to be met from the estate.
50
What is a potential issue with a will that states gifts free of tax?
If no part of the estate is available to pay IHT, it is not possible to shift the burden effectively.
51
What creates complications when allocating IHT exemptions?
If part of an estate qualifies for an exemption or relief, it complicates determining where the burden of IHT falls.
52
Who is liable for IHT in relation to joint tenant property?
The surviving co-owner is liable.
53
Who is liable for IHT concerning statutory nominations?
The nominated beneficiary is liable.
54
Who bears the liability for IHT on donationes mortis causa?
The lifetime donee is liable.
55
What is the liability for trust assets concerning IHT?
The trustees are liable.
56
How is the IHT liability calculated among parties?
The proportion owed by each is calculated with reference to the value of the asset relative to the value of the whole estate.
57
Who is liable for IHT in respect of the free-estate?
The PRs are liable.
58
What is the Annual Exemption for gifts?
Individuals can make gifts of up to £3,000 each tax year free from IHT.
59
What happens if more than one transfer is made on the same day?
The annual exemption is applied pro rata.
60
What is the maximum Annual Exemption available for two tax years?
A maximum of £6,000 may be available.
61
What is the Family Maintenance exemption?
Maintenance payments are not treated as transfers for IHT if made to certain relatives.
62
What is the Small Gifts Allowance?
Individuals can make small gifts of up to £250 per recipient free from tax.
63
What is the Marriage Exemption?
Gifts made in consideration of marriage are exempt up to specified limits based on the donor's relationship.
64
What are the requirements for normal expenditure out of income to be exempt from IHT?
The transfer must be from income, part of a normal pattern of giving, and not affect the donor’s standard of living.
65
What is Taper Relief?
It reduces the amount of IHT payable on lifetime transfers made 3-7 years before the transferor's death.
66
What must happen for Taper Relief to apply?
The transferor must have died and IHT must be payable on the lifetime transfer.
67
Does Taper Relief reduce the value of a lifetime transfer?
No, it reduces the final tax bill proportionately.
68
What is the effect of Taper Relief on IHT calculations?
It must be calculated separately from the death estate's IHT.
69
What is Taper Relief?
A provision that reduces the amount of IHT due in respect of a lifetime gift which becomes taxable following the donor’s death.
## Footnote
Taper Relief applies when certain conditions regarding the timing of gifts are met.
70
What happens if a PET fails?
No IHT is due in respect of the failed PET if the donor did not survive 7 years from making it.
71
What is the Annual Exemption (AE)?
Allows individuals to make gifts of up to £3,000 each tax year free from IHT.
72
How does Taper Relief apply to a failed PET if the donor survived 3.5 years?
80% of the tax bill remains payable.
73
What does a failed PET or LCT result in?
An IHT charge in its own right.
74
What is the benefit of lifetime exemptions and reliefs?
They reduce the chargeable value of transfers, leading to a smaller tax bill and a larger NRB.
75
What is the Family Maintenance Exemption?
Applies to transfers for the purpose of education or maintaining dependent family members.
76
What is the Small Gifts Exemption?
Allows small gifts of up to £250 per recipient per tax year, free from tax.
77
What is the Marriage Exemption?
Allows tax-free gifts of £5,000, £2,500, or £1,000 depending on the relationship with the donee.
78
What does Normal Expenditure out of Income refer to?
Regular payments of spare income that do not affect the donor’s standard of living are exempt from IHT.
79
What is the Spouse Exemption?
All transfers between spouses/civil partners are fully exempt from IHT.
80
What is the Charity Exemption?
All transfers to charity are fully exempt from IHT.
81
What is a Gift with Reservation of Benefit (GROB)?
A situation where the donor gives away an asset but continues to benefit from it.
82
What are the three main goals of IHT planning for a client?
* Minimise IHT
* Retain sufficient assets for financial security
* Provide adequately for the family after death.
83
What distinguishes tax avoidance from tax evasion?
Tax avoidance is lawful arrangement to minimize tax liability, whereas tax evasion is unlawful withholding of information to avoid paying tax.
84
What is the significance of the 7-year rule in relation to IHT?
If a donor dies within 7 years of making a gift, the value of the gift may use up part of the NRB.
85
Fill in the blank: Taper relief can be applied to IHT payable following a _______.
re-assessment of the LCT.
86
True or False: The Annual Exemption can be used with the Small Gifts Exemption.
False.
87
What should clients be advised regarding the use of the Annual Exemption?
To use it each year to make gifts without IHT consequences.
88
What factors can affect the effectiveness of tax planning?
* Actions may trigger CGT
* Irreversibility of gifts
* Anti-avoidance legislation.
89
What is the potential consequence of not properly advising clients on IHT and CGT?
They may not achieve the intended tax savings and could face unexpected tax liabilities.
90
What is the reduced IHT rate applicable if a person leaves 10% or more of their net estate to charity?
36%
## Footnote
This reduced rate applies to the taxable portion of the estate.
91
What are the two types of property relief under IHT?
Business Property Relief (BPR) and Agricultural Property Relief (APR)
## Footnote
BPR and APR can exempt transfers of qualifying business/agricultural assets up to 100% or 50%.
92
What should clients consider when investing in assets that qualify for BPR/APR?
Investing in farming partnerships or purchasing AIM shares
## Footnote
AIM shares are considered 'unquoted' for the purposes of BPR.
93
Which payments are excluded from the taxable estate?
Discretionary pension lump sum payments and life insurance policies written in trust
## Footnote
Clients can be advised to set up these policies to minimize IHT.
94
What is a PET?
Potentially Exempt Transfer
## Footnote
A PET does not incur a charge at the time it is made if the donor survives 7 years.
95
What is the risk associated with making a PET?
The risk of not surviving 7 years
## Footnote
This could result in IHT being charged on the transfer.
96
How can a client mitigate the risk of dying within 7 years after making a PET?
By taking out fixed term life assurance
## Footnote
This policy would cover the IHT liability on the PET.
97
What happens if IHT is charged following a donor's death?
It is charged on the value of the PET at the time it was made
## Footnote
Not on the date of death value.
98
What is the parental settlement rule?
Income arising from property given to a minor child is taxed as if it still belongs to the parent
## Footnote
This applies if the income exceeds £100.
99
What is an LCT?
Lifetime Chargeable Transfer
## Footnote
An LCT is immediately chargeable to IHT.
100
What is the significance of the nil rate band (NRB) in relation to LCTs?
If the donor dies within 7 years of making the LCT, it is reassessed at the death rate based on the NRB
## Footnote
This may affect the IHT payable.
101
What is one ethical requirement when taking instructions for a will?
Only act on instructions from the client or someone properly authorized
## Footnote
This is to avoid undue influence and ensure the validity of the will.
102
What is testamentary capacity?
The legal ability of a person to make a valid will
## Footnote
A solicitor must ensure their client has this capacity when drafting a will.
103
What should a solicitor do if testamentary capacity is in doubt?
Obtain consent to approach a medical practitioner for confirmation
## Footnote
This is known as the 'golden rule'.
104
What is the consequence of a solicitor preparing a will without a client having testamentary capacity?
The will may be challenged and deemed invalid
## Footnote
Evidence of capacity is crucial to uphold the will's validity.
105
What should be documented when taking instructions for a will?
A detailed file note of the client's instructions and an assessment of their testamentary capacity
## Footnote
This documentation can serve as evidence if the will is challenged.
106
What is the risk if a solicitor drafts a will that includes a significant gift to themselves?
There is a risk of a conflict of interest
## Footnote
It is recommended to refuse such instructions unless independent legal advice is obtained.
107
What is a good practice for solicitors when taking instructions for a will?
Conduct a personal interview with the client
## Footnote
This ensures that all relevant information is gathered and understood.
108
What should be considered to prevent claims against a client’s estate under IPFDA 1975?
Take full details of family members and any dependants
## Footnote
This helps provide comprehensive advice and reduce risks.
109
What is a key event that should prompt a review of a will?
Marriage or civil partnership
## Footnote
Other events include divorce, birth of children, and substantial changes in asset value.
110
Why is it important to review a will at regular intervals?
To account for tax changes or changes in the testator’s financial situation
## Footnote
Regular reviews ensure that a will remains relevant and effective in light of changing circumstances.
111
List some events that may trigger a review of a will.
* Marriage or civil partnership
* Divorce or dissolution of civil partnership
* Birth of children
* Death of close relatives/beneficiaries
* Substantial change in the value of assets
* Recent inheritance of their own
* Moving or acquiring assets abroad
## Footnote
These events can significantly affect the distribution of assets and the intentions of the testator.
112
What are some professional conduct matters to consider when providing will drafting services?
* CCS 3.1 - 3.4
* CCS 6.1
* IPFDA 1975
* Common law duties and obligations
* Your firm’s best practice
## Footnote
Adhering to these guidelines ensures ethical and professional service in will drafting.
113
True or False: Professional conduct matters are only relevant in certain departments.
False
## Footnote
Professional conduct matters are important across all aspects of work, regardless of the department.
