IHT Flashcards
(133 cards)
1
Q
What is the rate of tax for the current tax year?
A
Nil rate band 0%
Lifetime rate 20%
Death rate 40%
2
Q
Which date till which date does a tax year run?
A
A tax year runs from 6 April one calendar year to 5 April the following calendar year.
3
Q
which government body administers IHT
A
HMRC
4
Q
What are the three kinds of IHT trigger events?
A
- Potentially exempt transfers (PET)
- Lifetime Chargeable Transfers (LCT)
- Death
5
Q
What are Potentially exempt transfers (PET)?
A
A PET is a transfer of value given during a person’s lifetime, which is not chargeable at the time of the transfer, but will become chargeable to IHT if the transferor dies within 7 years of making the PET.
So, a PET itself is not chargeable, only a failed PET is chargeable.
6
Q
What are Lifetime Chargeable Transfers (LCT)?
A
An LCT is a transfer of value which is a transfer into a trust. It is immediately chargeable to IHT at the time of the transfer at the lifetime rate of 20%. .
7
Q
When is a LCT reassessed?
A
An LCT is reassessed if the tranferor dies within 7 years of the making the transfer.
Reassessed means that the transfer is now charged at the death rate.
Tax that has already been paid during the transferor’s lifetime at the lifetime rate will be deduceted fromt the tax taken at death rate amount of 40%.
8
Q
What are the differences between a PET and LCT?
There are 3 main differences.
A
- PET is a transfer to a person whereas as LCT is a transfer into a trust.
- PET is not chargeable at the time of transfer, LCT is immediately charegable upon transfer
- As PET is not charged at the time, no tax rate applies. LCT is chargeable immediately so lifetime tax rate of 20% applied.
9
Q
What are Death transfers?
A
A death transfer os when a person has died and it is deemed that there is a transfer of all their assets.
IHT is chargeable on this transfer of value.
10
Q
What is a chargeable transfer?
A
A chargeable transfer is a ‘transfer of value’ made by an individual which is not an ‘exempt transfer’ (s 2(1) IHTA).
11
Q
What is a transfer of value?
A
A ‘transfer of value’ is a disposal/transfer which results in an immediate decrease in the value of the individual’s estate (s 3(1) IHTA).
Meaning it is given away, so the individual has less stuff that he owns.
Broadly, this means gifts but it can also include transactions at an undervalue.
12
Q
What is the main example of a transfer of value?
A
A gift.
13
Q
How is the value of a transfer of value calculated for lifetime transfers?
A
For lifetime transfers, it is assessed by reference to the loss in value to the donor.
14
Q
How is the value of a transfer of value calculated for death estates?
A
For the death estate, the value is calculated by reference to the market value of items in the estate on the date of death (s 160 IHTA).
15
Q
What is IHT due immediately on?
A
Only on LCTs
16
Q
What is the nil rate band?
A
NRB is an amount of money, upto £325,000, that individuals can make chargeable transfers of without being liable to IHT. This is because from £0 to £325K, a person is taxed at the rate of 0%, so taxed at nothing.
17
Q
Gemma has died. She only made a a LCT of £255,000 and nothing else in her life.
How much tax does Gemma has to pay and why?
A
Gemma will have to pay 0 tax because the amount transferred (£255K) is below the NRB of £325K.
18
Q
What is transferable nil rate band?
A
When an individual’s surviving spouse/civil partner inherits the unused portion of their NRB.
If you use half of your spouse unused NRB, you will inherit it as half of the current NRB.
19
Q
How is TNRB applied?
A
The surviving spouse can claim an increase in the survivor’s NRB equal to the unused percentage of the first spouse’s/deceased’s NRB. e.g 150% (100% NRB of surving spouse + 50% NRB from deceased spouse) of £325,000.
20
Q
what happens if there are changes in the nil rate band threshold?
A
The amount of the TNRB is equal to a % of the NRB threshold on the date the survivor dies.
e.g NRB was was £312,000 when first spouse died. but NRB is now £325,000 when second spouse died. you only consider the later nil rate band, so £325,000.
21
Q
when is TNRB available to be used?
A
after the surviving spouse dies. so both partners need to be dead. you cannot try to claim it when only one partner is dead.
22
Q
Can individuals who have had multiple spouses claim TNRB for each spouse? If so, subject to what?
A
yes, subject to a cap of 100% a full nil rate band being transferred
23
Q
Can the surviving spouse pass the TNRB from previous spouses to a new spouse?
A
Yes - but capped at 100% nil rate band.
24
Q
When do PRs need to make a claim for TNRB?
A
The PRs of the surviving spouse must make a claim for the TNRB in the IHT return/IHT400 within two years of the end of the month of death (or within three months of the PRs first acting, if this is later).
If they fail to do so, anyone else who is liable to pay the IHT on the surviving spouse’s death can make the claim after the deadline for the PRs to claim has passed.
HMRC has discretion to extend the deadline.
If an individual survives more than one spouse, a separate claim must be made for each TNRB.
25
what is the residence nil rate band?
This is an amount that is tax free/deduction, £175,000, applicable for passing on a home to direct descendants.
26
What is the value of the residence nil rate band?
£175,000
27
What conditions need to be satisfied for the residence nil rate band to qualify?
(a) The deceased died on or after 6 April 2017
(b) Their death estate included a 'qualifying residential interest' ('QRI')
(c) The QRI was 'closely inherited' by a 'direct descendent'
28
What happens if part of the QRI is closely inherited but the other part is not?
Only the chargeable value of the share which is closely inherited is taken into account when calculating the value of the RNRB.
29
Can an individual's surviving spouse or civil partner inherit the unused portion of their spouse's RNRB?
Yes
30
What happens if the deceased share of the property is worth less than the RNRB amount (£175,000)?
The RNRB amount is capped at the value of the deceased's interest in the property.
31
Why would a deceased spouse not use their QRI?
• did not own a QRI e.g. they did not own a residential property; or • they did not qualify for the RNRB because they left a QRI to someone who was not a lineal descendant.
32
There is a tapered withdrawal of the RNRB for estates with a net value of what amount?
Of more than £2 million.
33
What is net value in the context of tapered withdrawal?
The value of the assets which comprise the taxable estate, after debts have been deducted, but before exemptions and reliefs are applied.
34
There is no RNRB available for net estates worth how much?
There is no RNRB available at all for net estates worth £2,350,000 or more.
35
PET's can only be made to who?
- Individual persons
- Bare trusts in favour of individual persons
- Trustees of a disabled trust
- to an interest in possession trust or accumulation and maintenance (A&M) trust if the gift was made before 22 March 2006
36
If the transferor dies within 7 years of making an LCT, what happens?
If the transferor dies within 7 years, the LCT will be reassessed to tax at the death rate of 40%, with reference to the NRB amount at the date of death.
37
What is property in the taxable estate valued at?
Property in the taxable estate is valued at the price it might reasonably be expected to fetch if sold on the open market immediately before the death (s 160 IHTA).
## Footnote
It is important to note that the taxable death estate is not the same as the succession estate.
38
If a person dies, what are the possible transfers that are taken into consideration?
1. death transfers
2. failed PETs
3. LCTs where transferor dies within 7 years of making the transfer.
39
What is cumulative total?
Total chargeable value of all chargeable transfers made in the previous 7 years.
40
How is IHT calculated on a failed PET or LCT?
Calculate cumulative total
Identify value transferred
Apply exemptions and reliefs
Apply NRB and calculate tax
Apply taper relief
Give credit for tax paid in lifetime
41
how is IHT calculated on reassessed PETs or LCT?
step 1 = calculate cumulative total
Step 2 = identify value transferred (often same as cumulative total).
step 3 = apply exemptions and reliefs
step 4 = apply NRB and calculate the tax.
step 5 = apply taper relief
step 6 = giving credit for tax paid during their lifetime.
42
if a donor survives more than 7 years after a LCT is made into a trust, is it reassessed upon death?
No,
if Donor survives more than seven years after the LCT, it is not reassessed at the death rate.
so they only pay the 20% lifetime rate immediately after it is transferred.
43
explain step 5, taper relief?
44
Explain step 6, giving credit for tax paid during lifetime?
when an LCT is being reassessed you also need to factor in tax they paid during their lifetime.
you need to minus the IHT paid during lifetime from the IHT that will be paid on death estate. only the balance is needed to pay HMRC.
if the balance is reduced to zero, then no IHT to pay.
45
How is IHT calculated on death estate?
Calculate cumulative total
Identify assets included in the taxable estate
Value the taxable estate
Deduct debts/expenses
Apply exemptions & reliefs
Apply RNRB
Apply basic NRB and calculate tax
46
Can individuals who have survived more than one spouse claim the TNRB in respect of all of them?
Yes - subject to a cap of 100% of a full nil rate band being transferred.
47
What is a Qualifying residential interest?
A QRI is a residential property interest which is part of the deceased's estate immediately before death.
48
What happens if the deceased had more than one residential property interest in their estate at death?
The PRs must nominate one of them as their QRI.
49
What is a residential property interest?
A residential property interest is an interest in a dwelling-house which the deceased occupied as their residence at some point during their period of ownership.
50
What does a residential property interest not include?
It does not include rental investment properties in which the deceased never lived.
51
A beneficiary closely inherits from the deceased if they receive the QRI by what three methods?
• gift under the will
• operation of the law of intestacy
• operation of the rules of survivorship
52
Does a beneficiary with a contingent interest following death closely inherit?
No
53
What constitutes direct descendants?
(a) The deceased's children, grandchildren, great-grandchildren and other lineal descendants.
54
What type of children are included as a direct descendant of a deceased?
Adopted children, step-children, foster children and children for whom the deceased was a guardian or special guardian are included.
55
Is it possible to transfer any unused RNRB to a surviving spouse?
Yes - it does not matter if the deceased spouse died before the qualifying date (April 2017).
56
When transferring RNRB, does the home that the surviving spouse leave to their direct descendants have to be the same house that they lived in with their deceased spouse(s)?
No
57
When transferring RNRB, does the deceased spouse need to have owned any QRI?
No
58
No RNRB can be claimed for net estates worth which amount?
£2,700,000 or more.
59
What is downsizing rules?
Rules which allow an estate to qualify for a full RNRB even if the deceased did not own a QRI.
60
What conditions must be fulfilled to qualify for downsizing?
• the deceased must have given away their QRI or downsized to a less valuable QRI on or after July 2015.
• a direct descendant inherits the replacement QRI and/or other assets.
61
When is a claim for downsizing addition made by the PR?
A claim for the downsizing addition is made by the PRs within 2 years of the end of the month of death.
62
How is the cumulative total for a lifetime transfer calculated?
The cumulative total is calculated by adding up the value of all chargeable transfers made in the 7 years prior to the transfer.
63
Does the RNRB apply to lifetime transfers?
No
64
What are reassessed transfers?
PETs or LCTs made in the 7 years before death must be reassessed to IHT.
65
What assets are included in the death estate even if it may not be obvious why?
• All jointly owned property
• Property subject to a reservation
• Donationes mortis causa (DMC)
• Statutory nominations
• Some interests in possession
66
What is the treatment of interests in possession trusts created before March 2006?
Before 22 March 2006, the capital value of all interest in possession trusts was treated as being owned by the person with the interest in possession for IHT purposes.
67
What is the treatment of interest in possession created after 22 March 2006?
After March 2006, if a life interest trust is created following someone's death, the life interest is referred to as an 'immediate post death interest'.
68
What assets are excluded from the taxable death estate?
• 'Excluded property'
• Insurance policies written in trust for a third party
• Discretionary pension scheme payments
69
What is the general rule regarding the value of assets in the death estate?
The general rule is that the assets in the estate are valued at market value at the date of death.
70
What are exceptions regarding the general rule of the value of assets in the death estate?
Related property: If assets owned by spouses are worth more when valued together.
Joint property: Where land is co-owned, the value of the deceased's share is reduced to reflect the difficulty of selling a share of the property.
71
What is the deduction not applied to?
The deduction is not applied where the co-owners are married, as the related property rules apply and take priority.
72
How is the value of jointly owned assets calculated after one co-owner dies?
The taxable estate will include the value of the jointly owned asset as £135,000 (90% of £150,000).
## Footnote
Example: Two siblings own a house worth £300,000, each half share is £150,000.
73
What are the exemptions and reliefs relevant to the death estate?
Spouse exemption, Charity exemption, Business property relief, Agricultural property relief.
74
Who is liable to pay Inheritance Tax (IHT)?
The person in whom the assets vest (donee) is usually liable to pay IHT.
75
Who pays tax for a Lifetime Chargeable Transfer (LCT) in a trust fund?
The trustees of the trust which receives the assets are liable to pay the tax.
76
What happens if the trustees do not pay the tax?
If the trustees do not pay the tax, the donor becomes liable or may elect to pay the tax.
77
Who is liable for failed Potentially Exempt Transfers (PETs) and LCTs after the donor's death?
The lifetime recipient (donee) is liable to pay the IHT due.
78
What is the deadline for payment of IHT for failed PETs and LCTs?
6 months from the end of the month of death.
79
What happens if the recipient of a lifetime transfer does not pay the IHT due?
The deceased's PRs will become liable.
80
Who bears the ultimate burden of tax when estate funds are used to pay IHT?
The ultimate burden of the tax falls on the residuary beneficiaries.
81
What is free estate?
The assets that an individual is free to dispose of by his will or that pass under the intestacy rules.
82
Who is liable to pay IHT on free estate?
The deceased's PRs are liable to pay this tax.
83
Where is IHT paid from unless a contrary intention appears in the will?
IHT is paid from residue.
84
What is the general rule regarding gifts in a will regarding tax?
Gifts in a will (other than residue) are deemed to be given 'free of tax'.
85
Who bears the IHT liability for death estates not passing by will?
The liability for payment falls on the beneficiary of the item.
86
How is apportionment determined for individuals paying IHT on estates that do not pass by a will?
The proportion owed is calculated with reference to the value of the asset relative to the value of the whole estate.
87
What exemptions/reliefs are available for lifetime transfers only?
Annual exemption, Family maintenance exemption, Small gifts exemption, Marriage exemption, Normal expenditure out of income exemption, Taper relief.
88
What exemptions/reliefs are available for death only?
Woodlands relief, Quick succession relief.
89
What exemptions/reliefs are available for both lifetime transfers and death estate?
Spouse exemption, Charity exemption, Business property relief, Agricultural property relief, Political party exemption, Exemptions for gifts for national purposes or to heritage maintenance funds, Exemption for gifts to Employee Benefit Trusts, Exemption for gifts to housing associations.
90
What is the annual exemption?
The AE allows individuals to make gifts of up to £3,000 each tax year free from IHT.
91
Can a transferor use unused AE from the previous tax year?
Yes, after using the AE for the current tax year, a transferor may use any part of the AE from the previous tax year that was not used.
This would add up to £6000.
92
Donor makes a gift of £4000 is made in May 2019. The donor then makes a gift of £6000 in January 2020. the previous tax year's AE has been used up.
How much annual exemption is available and why?
onnly £3000 AE available.
this is because tax year will run april 2019 to April 2020, therefore, January 2019 is not a new year but still part of the current tax year.
also the previous tax year cannot be used because its already used up.
93
with regards to AE, clients should be advised to do what?
1. use the AE each year.
2. appreciate that consistent giving away over a number of years saves a lot of items from IHT
3. AE should be used after any other available exemption/relief is applied.
94
if there is two gifts made and you use the annual exemptions (£6K for current and previous year) and you are left with some left over annual allowance, can you carry it over to the second gift made that same year?
no you can not carry it over to the same year same gift. the remaining annual allowance has to be wasted.
95
can AE be used alongside small gifts allowance?
No.
if the gift is over £250, the client should be encouraged to use AE instead of small gifts.
96
Maintenance payments are not treated as transfers for IHT purposes if made to which three people?
A spouse, minor child for maintenance, education or training, or a dependent relative.
97
What is the maximum amount for small gift allowance?
£250.
98
Can a donor combine small gifts allowance with Annual Exemptions when gifting to one person?
No, they cannot combine the allowances for a single person.
99
What is the marriage exemption amount if made by a parent of one of the parties?
£5,000.
100
What is the marriage exemption amount if made by one party of the marriage to the other?
£2,500.
101
What is the marriage exemption amount if made by their remoter ancestor? e.g grandparents
£2,500.
102
What is the marriage exemption amount in any other case?
£1,000.
103
can marriage allowance be used with AE?
yes.
104
What are the requirements for normal expenditure out of income to be exempt?
From the donor's income, as part of a normal pattern of giving, and does not affect the donor's standard of living.
105
what will need to be provided for HMRC to accept a claim in relation to normal expenditure out of income relief?
proof of payment.
clients should be advised to keep a log of all payments they make and it can be submitted along with the death estate info.
106
What conditions must be met before taper relief applies?
A lifetime transfer was made 3 - 7 years prior to the transferor's death and IHT is payable.
107
How much is spouse exemption?
Gifts between spouses are completely exempt.
108
Can unmarried couples claim spousal exemption?
No, unmarried couples cannot claim spouse exemption.
109
When does spouse exemption not apply even when it is a gift between spouses?
It does not apply if they receive a remainder interest.
110
When does charity exemption apply?
Provided the gift is used exclusively for the purposes of the charity.
111
If a deceased leaves at least X% of their net estate to charity, what reduced rate will apply?
If at least 10% is left to charity, a reduced rate of 36% IHT may be available.
112
What conditions must be fulfilled for the gift to political parties exemption?
The party had at least two MPs elected or one MP elected with at least 150,000 votes.
113
Which bodies are covered by the gifts for national purpose exemption?
Museums and galleries for public benefit.
114
What funds qualify for the gifts to heritage maintenance funds exemption?
Trusts maintaining historic buildings or land of scenic, scientific and historic interest.
115
What assets are qualifying business assets for Business Property Relief?
Unquoted shares, quoted shares (if controlled), business or interest in a business, and assets used for business.
116
What rates of relief apply for different business assets?
Unquoted shares - 100%, Quoted shares - 50%, Business or interest in a business - 100%, Assets used for business - 50%.
117
What is not considered business property?
A business that consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments.
118
What is the qualifying period of ownership for Business Property Relief?
The transferor must have owned the business assets continuously for at least 2 years before the transfer.
119
What are the exceptions to the 2 year rule for Business Property Relief?
If qualifying assets are sold and replaced, if inherited following someone's death, or if inherited from a spouse.
120
What three conditions must be met for BPR on PET or LCT of qualifying business assets?
The property must be owned by the transferee, qualify for BPR when the transferor dies, and no minimum ownership requirement for the transferee.
121
What assets are qualifying agricultural property?
Agricultural land and buildings, farmhouses, and cottages occupied for agricultural purposes.
122
What are the qualifying periods of ownership for agricultural purposes?
Occupied for agricultural purposes for two years or owned and occupied for seven years.
123
What are the exceptions to the qualifying period of ownership rule for agricultural property?
If qualifying assets are sold and replaced, if inherited following someone's death, or if inherited from a spouse.
124
What is the rate of relief for agricultural property?
100% relief if the transferor was the owner-occupier or the property was let on a tenancy beginning after 1st September 1995.
125
What is used to calculate the value of agricultural property?
Agricultural value.
126
What three conditions must be met for APR on PET or LCT of qualifying agricultural property?
The property must be owned by the transferee, qualify for APR when the transferor dies, and no minimum ownership requirement for the transferee.
127
If both BPR and APR apply, which relief is given priority?
APR is given priority over BPR.
128
Is it possible to claim BPR on a business asset if that asset also qualifies for APR?
No.
129
Is livestock included in the definition of agricultural property?
No, but its value may qualify for BPR.
130
How long must a deceased own woodland for woodland relief to apply?
At least 5 years before dying.
131
How long must a deceased own inherited woodland for woodland relief to apply?
There is no qualifying period of ownership.
132
What is the value of woodland based on?
The value of the trees (timber) and not the land itself.
133
What conditions must be satisfied for Quick succession relief to apply?
The death estate includes assets received by gift or inheritance in the 5 years before death that were subject to an IHT charge.
