Inheritance Tax

Question 1

Effect of domicile

Answer 1

UK Doms: liable to IHT on worldwide assets

Non-doms: liable to IHT only on transfer of UK assets

Question 2

What is the principle we use when valuing donor’s estate?

Answer 2

The loss to the donor’s estate

Question 3

What is the related property rule?

Answer 3

If Donor has shares of a certain value and so does their spouse, the starting value of estate is calculated with both of their shares in mind, and the final value of the estate after the transfer also takes both into account

Question 4

LIFETIME TRANSFERS - which transfers are exempt?

Answer 4

1. Gifts to charity
2. Gifts to spouses
3. Small gifts of £250
4. Gifts on marriage
5. Normal expenditure out of income (e.g. supporting a child)

Question 5

Does the Annual Exemption only apply to life-time transfers, and how much is it?

Answer 5

Yes, and it is £3,000. You must use this on the first gift in time and you must use it before bringing forward the unused £3,000 (or what is left from it) from the previous year (if applicable).

Question 6

How to calculate tax on CLTs?

Answer 6

1. Apply annual exemptions (£3,000) to get to net chargeable amount
2. Add up any CLTs made within 7 years of gift (gross amount of transfer + any tax paid)
3. Take away from NRB
4. Apply relevant tax-rate to anything over NRB: 20% if trustees paying and 25% if donor paying

NOTE: if donor pays the tax, the value of the gift is taken to include the amount of tax paid (taxable gift amount + tax paid)

Question 7

How do we work out tax on PETs which become chargeable (on death)?

Answer 7

1. Apply annual exemptions to get to net chargeable amount
2. Deduct from NRB any PETs made 7 years before PET
3. Tax anything above at 40%
4. Taper the amount of tax:
   0-3 years - 0
   3-4 years - 20
   4-5 years - 40
   5-6 years - 60
   6-7 years - 80

= if 80% taper relief, take 20% from the taxable amount

Question 8

How do you calculate death tax on CLTs?

Answer 8

Additional tax if donor dies within 7 years of CLT - same process as CLT lifetime transfer but tax now paid at 40% (with taper relief) and then tax already paid is deducted

Question 9

What IHT tax reliefs are available for lifetime transfers?

Answer 9

BUSINESS RELIEF

AGRICULTURAL RELIEF

Question 10

BUSINESS RELIEF (only applies to trading business, not investment businesses etc)

Answer 10

100% relief:

• business or interest in partnership
• shares in an unlisted company

50% relief:

• Quoted shares (more than 50% ownership)
• Land plant or buildings used in trade

Must have owned property for at least 2 years

Question 11

AGRICULTURAL RELIEF - available at 100%

Answer 11

100% relief for transfers of land and buildings used for the purposes of agriculture in UK, Channel islands, Isle of Man or EEA

Available to farmer who owns the land (2 years min) or landowner letting the land to a farmer (7 years min)

Question 12

How do we calculate IHT at death?

Answer 12

No annual exemption available (£3,000!) for tax at death
Value of estate
Minus liabilities and funeral expenses
Apply NRB to any CLTs or PETs in 7 years before death
Use remaining NRB and spouse transferred NRB on estate
Anything above taxed at 40%

Question 13

IHT on death - Value of estate

Answer 13

Exempt gifts:

Gifts to a spouse
Gifts to a charity

Excluded: Gifts passing outside the will - trusts with named beneficiary, pension fund with named beneficiary

Liabilities deducted (including income and CGT owed by the estate)

Question 14

What is the baseline value of the estate?

Answer 14

BASELINE = value of estate after deducting reliefs, exemptions, and available NRB

Question 15

What is the transferable NRB?

Answer 15

Applies only to transfers on death (not lifetime transfers)

Uplift based on a percentage of current NRB

Can transfer from up to 2 spouses

Question 16

What is the residence NRB? Death estate only

Answer 16

When private residence is left to a lineal descendant.

£175,000 tax free

Tapered for estates over 2million

Can transfer unused RNRB between spouses; tapered if spouses estate more than 2 million

Question 17

What is quick succession relief?

Answer 17

If A makes a transfer to B which is subject to inheritance tax and B dies within 5 years of transfer, B’s estate will not have to pay normal IHT. Amount of IHT increases by 20% for each year since A’s death

Question 18

What are the post-mortem reliefs?

Answer 18

Quoted Shares

Land and Buildings

Woodlands Relief

Question 19

How are gifts with reservation of benefit treated for the purposes of the estate?

Answer 19

Asset treated as still forming part of the estate UNLESS donor pays rent

Question 20

When is IHT due on chargeable lifetime transfers?

Answer 20

IHT due on the later of (i) six months from the end of the month the CLT was made or (ii) 30 April after the tax year in which it was made

Question 21

Who pays IHT on life-time transfers?

Answer 21

Donor or the trustee (25 v 20%)

Question 22

IHT on death - when paid?

Answer 22

6 months from the end of the month of death of transferor

Question 23

Who pays IHT on CLTs/PETs on death?

Answer 23

Trustees are liable and the burden will be on the beneficiaries

Question 24

Who is liable for tax on the death estate?

Answer 24

Freehold estate: Executors pay the tax; burden is on the residuary beneficiary

Property passing outside the Will: Executors pay; burden on the beneficiary

Property held in a trust: Trustees pay; burden is on the beneficiaries

Gifts with reservation of benefit: Donee of the gift pays. If unpaid after 12 months, it is paid by the executors

Question 25

When must PRs pay income tax and CGT from the death estate?

Answer 25

Returns filed by 31 January after tax year

May make payment as a lump sum of administration taxes + income tax and CGT owed

Question 26

Administration of estates: income tax and CGT rates

Answer 26

Income tax paid at basic rate 20%

CGT: PRs receive annual exempt amount £12,300 for the year of death and next two years only.

Rates: 20% for general gains
28% residential property