Inheritance Tax

Question 1

What are the 3 occasions where IHT is charged?

Answer 1

Death

Lifetime gifts made to individuals with 7 years prior

Lifetime gifts to a company or into a trust

Question 2

What is charged in IHT?

Answer 2

The value transferred by a chargeable transfer - a transfer of value which is made by an individual, but is not an exempt transfer.

Question 3

When may a chargeable transfer occur?

Answer 3

Transfer on death

A lifetime transfer which is PET but becomes chargeable when they die within 7 years

A lifetime transfer whcih is immediately chargeable at the time it was made.

Question 4

What are the 4 steps for IHT?

Answer 4

Identify the transfer of value

Find the value transferred

Apply any relevant exemptions and reliefs

Calculate tax and the appropriate rate

Question 5

What is a transfer of value?

Answer 5

Any disposition which reduces the value of the transferors estate. A gift of an asset reduces the value.

Question 6

What are the nil rate bands of IHT tax?

Answer 6

There are 2 bands:

Nil rate bank = 325,000

Residence nil rate bank = 175,000

Rate of tax that applies in excess of these varies according to type of transfer

Question 7

What is transferred for IHT on death?

Answer 7

Value transferred is the value of the deceased estae immediately before death

Property which passes
Property which they are beneficially entitled to
Property included because of statutory provisions (tst property, property given away by deceased during lifetime which is “subject to reservation” at time of death

Question 8

What property is included in the estate by statute?

Answer 8

Trust property - wehn beneficial who is entitled to all income from trust dies, the trust fund is taxed as if it were part of estate.

Property subject to reservation : where deceased gave away property during their lifetime, but did ot transfer possession and enjoyment of the prperty. Treated as being beneficially entitled.

Question 9

What property is OUTSIDE the estate for IHT purposes?

Answer 9

Property in whcih decceased did not haev interest in, falls OUTSIDE definition - life assurance policy written in trust for a named beneficiary, and a discretionary trust from pension fund

Therefore:
Pension fund not included
Life assurance in another’s name is not

Question 10

How do you find the value transferred?

Answer 10

Assets in the estate are valued for IHT purposes as “the price which the property might reasonably be expected to fetch if sold in the open market” immediately before the death.

This is called “probate value”

Question 11

What is the modification of the basic valuation principle?

Answer 11

Section 171 IHTA, 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.

Question 12

How are quoted shares valued for IHT purposes?

Answer 12

Value is taken for the date of death. It quotes two prices, so you take one-quarter of the difference between the lower and higher price, and add it to the let price .

Question 13

What are teh exemptions and reliefs for IHT?

Answer 13

Spouse or civil partner exemption charity exemption
Business property relief
Agricultural property relief

Question 14

What is the spouse or civil partner exemption for IHT?

Answer 14

A transfer of value is EXEMPT TRANSFER to the extent that value transferred would become the estate of the transferors spouse or civil parter.

Therefore, any property included for IT purposes is EXEMPT if it passes to deceases spouse.

Question 15

If transferor is domiciled, what is the limit of the spouse or civil partner exemption?

Answer 15

If transferor is domiciled in UK, but transferee is NOT, the level of exemption is LIMITED to 325,000

Question 16

What s the charity exemption for IHT?

Answer 16

Transfer of value are EXEMPT if they are given to charities

Any property forming part of estate for IHT purposes, which passes on to charity is EXEMPT. (Same for museums and art galleries, and to political parties)

Question 17

What is the business property relief for IHT purposes?

Answer 17

Operates to reduce the value transferred by transfer of value of business property by a percentage.

This ONLy applies if business was trading.

100% reduction where value transferred is attributable to certain types of relevant business property: business or interest in a business, or for company shares that are NOT listed on stock exchange (unquoted)

50% for value for any other business property:
Company shares that are listed,
Land, building, machinery, plants owned PERSONALLY, but used for business purposes in a partnership.

Question 18

What are the time limits for the relevant business property relief for IHT?

Answer 18

They must have been OWNED by transferor for at least 2 years at the time of the transfer or replacement.

Question 19

What is agricultural property relief for IHT purposes?

Answer 19

Same as BPR.

Reduce agricultural value of agricultural property by a certain percentage.

100% reduction allowed where transfer had right to vacant possession immediately, or where property was subject to letting.

50% reduction in other cases.

Must be owned for 2 years prior to transfer, or owned for 7 years prior and was occupied by someone else through that period.

Question 20

What is the nil rate bank for IHT?

Answer 20

If deceased made no chargeable transfers in 7 years before death, the rate of tax on first 325,000 is 0%.

Question 21

What are the tax rates for IHT

Answer 21

If estate exceeds NRB, IHT is charged on excess at 40%.

In small cases, a special 36% rate apply - to increase charitable giving, and will apply instead of the 40%, when at leases 1% of the net estate is passed to charit.

If deceased died on r after 2007, having survived spouse, the NRB is increased by whatever percentage the spouse was unused (subject max increase of 100%- 325,000)

Question 22

What happens if the deceased made any chargeable transfers in the 7 years before death?

Answer 22

Lifetime transfers use up deceased NRB first, reducing the amount available for the estate.

Question 23

What is the residence nil rate band?

Answer 23

For deaths after 2017, RNRB is 175,000.

Question 24

When is the residence nil rate band allowed to be used?

Answer 24

Deceased must die owning a qualifying residential interest, which is CLOSELY INHERITED.

This is an interest in a dwelling hose wich has been their residence at any time.

Must pass to child, grandchild, or other lineal descendant of deceased, currnet spouse or civil partner or any deceased lineal descendants, or widow or a ideal descendant, who predeceased the deceased.

Question 25

When is the RNRB and NRB taxed?

Answer 25

RNRB is taxed first at 0%, reducing the amount of total chargeable estate. Then, NRB is taxed at 0%, and finally the remaining death estate at 40%

Question 26

When the estate is more than 2 million what happens to the residence nil rate band?

Answer 26

Where the estate is valued at 2 mil or more, the RNRB is reduced by £1 for every £ over 2 mill threshold.

175,000 - ( (value of estate-2 mil)/2) = adjusted RNRB

Question 27

If deceased did not use up RNRB, can the surviving spouse use it?

Answer 27

Yes, same as NRB.

Question 28

What are Potentially exempt transfers?

Answer 28

Any gift made by individual to another individual or into a disabled trust, to the extent in either case that the gift would be chargeable.

Question 29

What dispositions are excluded from PET?

Answer 29

Transfer for maintenance, education or training of the transferors child under 1, or over that age if still undergoing full time educate, or maintenance of dependant relative.

Question 30

If someone owns a pair of chairs, which together value 80,000, but individually they are worth 25,000, and X gives one chair to , what is the loss of her IHT estate?

Answer 30

Loss to estate is 55,000

They would have been valued together, therefore 80,000 minus 25,000

Question 31

What is the annual exemption for lifetime only gifts?

Answer 31

3,000, but can carry it forward one year, therefore max 6,000.

Question 32

What counts as small gifts?

Answer 32

Lifetime gifts in any one tax year of 250 or less to any one person, are exempt.

Question 33

What are normal expenditure out of income?
Is this an exception for PET?

Answer 33

Lifetime transfer is exempt if it can show:

It was made out of transferors normal expenditure,
It was made out of transferors income, and,
After allowing for all such payments, transferor was still left with sufficient income to maintain usual standard of living.

Question 34

What is the max allowance of marriage gifts for PET exemptions?

Answer 34

5,000 by parent or party to marriage
2,500 by remote ancestor (grandparent)
1,000 in any other case.

Question 35

Why do PET have potentially exempt status?

Answer 35

They are only chargeable if the transferor dies within 7 years of making the lifetime transfer.

If lives 7 years, then teh transfer is automatically exempt.

Question 36

What are lifetime chargeable transfers? LCTs?

Answer 36

Immediately chargeable.

Example: lifetime transfer made on or after 206 into any trust, or to a discretionary trust or company.

Question 37

When an individual makes an LCT, what happens with the IHT calculation?

Answer 37

IHT calculation BEGINS with application of first 3 steps (identifying chargeable gains, value of gains, and reliefs).
Balance is then chargeable to IHT, and tax must be calculated by usual method.

Question 38

What relief is NOT available for LCT?

Answer 38

Small gift exception

Question 39

What are the rates of tax applicable to LCTs?

Answer 39

0% on first 325,000
20% on the balance of the chargeable transfer after this.

Question 40

What do lifetime chargeable transfers do to the nil rate band?

Answer 40

LCT made in the 7 years before current chargeable transfer, reduce the nil rate band available to that current transfer.

The value transferred by chargeable transfers made in 7 years before current chargeable transfer MUST be cumulated with that transfer.

Eg

2023, X transfers 50,000 to trustees of trust
2015, 10,000
2018, 280,000

No other lifetime transfers.

To calculate IHT due on chargeable transfer of 50,000 in 2023, the values transferred by any chargeable transfers made in 7 years prior must be “cumulated”.

The one more than 7 years ago can be ignored.

Question 41

What is the effect of death on lifetime transfers?

Answer 41

The death of a transferor may result ina. Charge to IHT on any transfers of value which the transferor has made in 7 years immediately preceding death, whether they were PET or LCTs.

PETs become chargeable.

IHT liability on LCTs is recalculated, and trustees will be liable for any extra tax payable.

Question 42

What is the cumulative total if the testator dies for PET and LCT?

Answer 42

Any LCTs made in the 7 years BEFORE THE PET BEING ASSESSED, even if LCT was made more than 7 years before transferors death.

And, any other PETS made during the 7 years BEFORE PET BEING ASSESSED, which have become chargeable as a result of the transferors death.

Example:

2017- 200,000
2021 - 200,000

Died in 2023, leaving estate of 400,000.

Both gifts are PETs, whcih are now chargeable, as X has died within 7 years.

Therefore loss to estate is ,6,000 and 6,000 for annual exemption, and taxed NRB 0%. NRB is used up on these. Rest is payable at 40%.

Question 43

What is tapering relief?

Answer 43

When PET becomes chargeable, tapering relief is available if the transferor survives for more than 3 years after the transfer.

The relief works by REDUCING any tax payable on PET

Question 44

What are the 4 different bands for tapering relief

Answer 44

3-4 years before death: 80% of death charge
4-5 years - 60%
5-6 years - 40%
6-7 years - 20%

You work out tax like normal, and then % of this is actually payable.

Eg. X dies 6-7 years after making PET, therefore 20% of hte tax calculated is actually paid.

Question 45

What is the effect of death on LCTs?

Answer 45

If transferor dies within 7 years of making an LCT, IHT must be recalculated and more IHT may be liable.

Tax bill may be increased, to PETS BEFORE the LCT may have become chargeable.

First 3 steps are the same.

Question 46

How do you calculate tax on LCTS after death?

Answer 46

Cumulative total relevant to LCT will determine how much of NRB is available.

Cumulative total is made up of:

Any other LCT made in 7 years BEFORE LCT being assessed,

Any PET made during 7 years BEFORE LCT being assessed.

Eg. X dies in 2023.

2016 PET of 100,000
2010, 300,000 LCT

The 2016 PET is within 7 years of death, therefore is chargeable. As a result, it has its OWN cumulating period, therefore necesary to look at 7 years back from that, therefore 210 LCT is within this and must be calculated.

Therefore only 25,00 left for the December 2016 PET.

It is NOT rechargeable, it is ONLY relevant for cumulative purposes. No effect on death estate

Question 47

What credit is given for any IHT paid for at time for LCT?

Answer 47

Credit is 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, no tax is refunded.

Question 48

When do you pay tax for LCT?

Answer 48

During the time, at 20% if more than 325,000

Question 49

Who has the burden of paying IHT tax?

Answer 49

Test or can change the statutory rules.

Question 50

What is the estate rate?

Answer 50

Average rate of tax applicable to each item of property in the estate.

(Total tax bill)/(total chargeable estate) x value of asset now = estate rate IHT they must pay

Question 51

Who is liable for IHT on death?

Answer 51

the PRs are liable to pay IHT on any property which was “immediately before death comprises in a settlement”

Property vested in PRs, and property whcih does not pass to PRs, but are part of the estate.

Question 52

Who has the liability for IHT on PETs

Answer 52

Where a person dies within 7 years, the transferee is primarily liable but the PRs become liable if tax remains unpaid for 12 months.

Question 53

Who has liability of IHT on LCTs?

Answer 53

Trustees pay.
If transferor pays, amount of tax will be MORE than if trustee pays.

Question 54

When is IHT payable?

Answer 54

6 months after the end of the month of death

Question 55

Can you pay IHT in instalments?

Answer 55

Yes, may be paid in 10 equal yearly instalments, first falling due 6 months after end of month of death.

Question 56

When are LCTs payable?

Answer 56

Any IHT on LCT made AFTER 5 April, and before 1 October, is due on the 30th April in the FOLLOWING YEAR.

Question 57

What are the 2 anti-avoidance for IHT?

Answer 57

Disclosure of tax avoidance schemes - DOTAS

General anti-avoidance Rule (GAAR)

Question 58

What is DOTAS

Answer 58

IHT is subject to regulations on DOTAS.

Require certain cache ELS to be disclosed to HMRC.

To constitute a noticeable arrangement, the main purpose must be to enable a person to obtain one or more of a list of specific advantages.

Question 59

What is GAAR

Answer 59

IHT is subject to GAAR, which is intended to enable HMRC to counteract abusive tax arrangements.

Arrangement for the purpose of GAAR would be reasonable to conclude that the obtaining of tax advantage was the main purpose.

Tax arrangement is abusive if the entering into it or carrying it out cannot reasonably be regarded as reasonable course of action.

Question 60

What are the instalment options properties?

Answer 60

Land of any description
A business or interest in a business
Shares (quoted or un), which gave control of company
Unquoted shares, that do not give control, if they are 10% or higher of value of company, and worth more than 20,000, OR HMRC is satisfied that the tax cannot be paid in one sum withotu undue hardship.

Question 61

Is interest required when the instalment option is used?

Answer 61

For business or agricultural land: Instalments carry interest ONLY from the date when each instalment is payable. Therefore not is due, if you PAY ON TIME.

For land however interest is payable with each instalment on the amount of IHT that was outstanding for previous year.

Question 62

When are LCTs payable?

Answer 62

Due on the 30th April in the following year.

Question 63

How must you calculate tax from PET on death when there are lifetime transfers?

Answer 63

The CUMULATIVE TOTAL is made up of:

Any LCTs made in the 7 years BEFORE THE PET being assessed, this could be more than 7 years before death,

And any other PET made during 7 years before PET being assessed.