IHT Exemptions & reliefs Flashcards
(31 cards)
What exemptions and reliefs are only available to lifetime transfers?
- Annual exemption
- Family maintenance exemption
- Small gifts exemption
- Marriage exemption
- Normal expenditure out of income
- Taper relief
These exemptions/reliefs can only be applied to transfers made during the donor’s lifetime:
- Failed PET
- LCT (taxed when made / re-taxed following death within 7 years)
What exemptions are available for both lifetime and death estate?
- Spouse exemption
- Charity exemption
- BPR
- APR
What exemptions are only available on death?
- Woodlands relief
- Quick succession relief
Annual exemption
- Gifts up to £3,000
- Lifetime ONLY
- It is used after any other exemption is applied
- Can use any remaining AE from previous year (can carry forward after current AE used)
- Max of £6,000 (2 x AE)
Family maintenance
Maintenance payments are not treated as transfers for IHT purposes if made to:
- Spouse
- Minor child
- Dependent relative to make reasonable provisions for their care
Small gifts allowance
- Small gifts of up to £250 per recipient
- No limit on the number of recipients
- Not available if combined with any other exemption (including annual exemption)
Marriage exemption
A gift given in consideration of a marriage
- £5,000 made by parent of one of the parties
- £2,500 made by one party of marriage to the other
- £2,500 remoter ancestor
- £1,000 any other case
Normal expenditure out of income
Transfer of value is exempt if made:
- from donor’s income
- as part of normal/regular pattern of giving
When does taper relief apply?
It reduces the amount of IHT which would otherwise be payable
Conditions:
1. A lifetime transfer was made 3-7 years prior to transferor’s death (failed PET / LCT re-assessed)
2. IHT is payable in respect of the lifetime transfer
Spouse exemption
Gifts between spouses during life and following death are completely exempt
Life interest trust:
- spouse exemption applies to the value of assets transferred to a life interest trust if the surviving spouse receives a life interest (life tenant)
- spouse exemption will not apply if the spouse receives the remainder interest
Charity exemption
- All transfers to registered charities are exempt
If a charitable gift is made under a will:
- Reduce rate of IHT to 36% if the deceased leaves at least 10% of estate to charity
Business property relief
- BPR reduces the IHT payable on qualifying business property
Qualifying business assets:
- unquoted shares (all private companies): 100% relief
- quoted shares (only if taxpayer owns more than 50%): 50% relief
- business or interest in business (sole trader / partnership interest): 100% relief
- assets owned used for business (land/buildings/machinery): 50% relief
Qualifying period of ownership:
- Transferor owned the assets continuously for at least 2 years prior to relevant transfer
BPR and lifetime transfers
Where someone makes a PET or LCT of a qualifying business asset and this transfer is assessed to IHT following death within 7 years of transfer, BPR is only available if:
- qualifying property is owned by transferee; and
- qualifies for BPR when the transferor dies
This means the person who received the assets must still own the property when the transferor (deceased) dies
Agricultural property relief
Agricultural property relief reduces IHT payable on agricultural value of qualifying assets
- APR can be claimed on 100% of agricultural value (not open market value)
Qualifying agricultural property:
- agricultural land and buildings
- farmhouses and cottages
Qualifying periods of ownership:
- Occupied for agricultural purposes by transferor for 2 years immediately before transfer
- Owned and occupied for farming purposes for 2 years
- Owned by transferor and occupied by them or another for agricultural purposes for 7 years before the transfer
APR and lifetime transfers
If a person makes a PET or LCT of qualifying agricultural property and this is assessed for IHT following death within 7 years, APR only available for lifetime transfer if qualifying property:
- Is owned by the transferee; and
- Qualifies for APR when the transferor dies
There is no minimum ownership requirement of 2 years for the transferee
APR and BPR
APR is given priority to BPR in scenarios where both reliefs would apply
Woodlands relief
Gifts of woodland following death
- available on death only
- If deceased purchased woodland, they must have owned it for 5 years before dying
- It is a deferral of IHT payable (rather than reduction)
- Those administering the estate should make an election to exclude the value of woodland from death estate
- As it is a deferral, if the estate is not subject to IHT there is nothing to defer and woodlands relief is not applicable
As it is a deferral rather than reduction of liability, may be preferable to consider alternatives if applicable:
- BPR
- APR
Quick succession relief
This is designed to reduce the burden of IHT where an estate taxable on death includes assets received within the previous 5 years from a transfer from another deceased
QSR applies where a person dies and:
- their death estate includes assets received by way of gift or inheritance
- in the five years before their death, and
- those assets were subject to IHT when transferred to deceased
For QSR to be relevant, IHT must have been payable both on the original transfer and following the subsequent death
- tax paid previously is credited against later IHT charge
Advising a client on tax planning
- What reliefs are available?
- What are the relevant criteria?
- How do these fit into the client’s objectives?
The objective of IHT planning is to reduce the overall IHT liability on a client’s estate
IHT planning - conduct concerns
Tax planning can be achieved by making transfers of property during person’s lifetime or under their will
Concerns when advising on tax implications:
- Actions taken to reduce IHT may result in charge to CGT or reduce the client’s future income
- Once gifts have been made or into a trust, usually not possible to get the assets back
- Anti-avoidance legislation
Lifetime IHT planning in relation to exemptions and reliefs
- Failed PET or LCT - IHT charge in its own right
- Even if PET or LCT does not trigger IHT, it uses up the NRB if donor dies 7 years following the transfer. This means a greater proportion of the estate is taxed at 40%
Advising clients how to use the exemptions/reliefs
- Annual exemption: advise clients to use AE each year to make gifts without IHT consequences. Should be used after any other available exemption
- Family maintenance: no upper limit
- Small gifts: cannot be used with annual exemption. Useful if a client has a number of potential beneficiaries
- Marriage: amount depends on relationship
- Normal expenditure out of income: most useful if a client has a large income and a significant amount is unused each month. For HMRC to accept this relief, proof of payments is needed - advise clients to keep a record.
- Spouse exemption: provides exemption for IHT and CGT purposes
- BPR: useful if the client already has property which qualifies. But clients could also choose to invest in assets that qualify for BPR / APR
What assets are not subject to IHT?
- Discretionary pension lump sum payments and life insurance policies written in trust are excluded from taxable estate
- Clients can be advised to take out life insurance policy and/or pay into a pension and write the benefit of these in trust
PETs:
- if a life policy is written in trust after it has been set up, there is a deemed PET of redemption value of policy
- if client pays the premiums on a life policy nominated for another, client treated as making a PET of annual premiums
Advice on client making transfers of value
Worth a client considering making PETs or LCTs as donor’s estate after a transfer is smaller and less IHT may be due as a result
PET:
- client can mitigate risk of dying within 7 years of giving PET by taking out a fixed term life assurance to cover cost of an IHT. Insurance policy proceeds could be written in trust to ensure the lump sum paid out is not itself tax
- If IHT charged following death, it is on the chargeable value of PET at the time it was made
