Inheritance Tax Flashcards
1
Q
What is IHT?
A
Tax paid on the estate of D
2
Q
Who and what does IHT apply to?
A
IHT applies to the worldwide assets of UK-domiciled taxpayers
3
Q
Is the scope of the Inheritance Act 1984 broad or narrow?
A
Broad - to prevent people avoiding it
4
Q
What are the current rates of tax?
A
NRB 0%
Lifetime rate 20%
Death rate 40%
5
Q
What are the three IHT trigger events?
A
potentially exempt transfers (PETs)
lifetime chargeable transfers (LCTs)
Death
6
Q
What is a PET?
A
A lifetime transfer of value which could become chargeable to IHT - depending on if the transferor survives 7 years after the transfer
7
Q
Are all PETs subject to IHT?
A
No - only failed PETs (where the transferor did not survive 7 years after it was made)
8
Q
What is a LCT?
A
A lifetime transfer of value which is immediately chargeable to IHT at the lifetime rate
9
Q
Are LCTs subject to IHT on death?
A
They can be - LCTs are reassessed if the transferor dies within 7 years
10
Q
What does transfer of value mean?
A
A transfer of value is a disposition which results in an immediate decrease in the value of the individuals estate
11
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
12
Q
What is typically a transfer of value?
A
Usually this is a gift made by the transferor - but it can also be a transaction at an undervalue (i.e selling your house to a family member for a lower price)
13
Q
The value of a transfer depends on what?
A
The trigger event - for lifetime transfers it is assessed by reference to the loss in value to the donor
For death estates - the value is calculated at the market value of the items
14
Q
What is the nil rate band?
A
£325,000
15
Q
What does the NRB mean?
A
It means individuals have a basic NRB of 325k - they can make up to 325k worth of chargeable transfers at a rate of 0%
16
Q
Can a surviving spouse inherit the remaining NRB?
A
Yes - this is known as the transferable nil rate band - TNRB
17
Q
What is the residential NRB?
A
£175,000 for individuals who die on or after 6 April 2017 - only if they leave their family home to a direct descendant
18
Q
Surviving spouse and RNRB?
A
A surviving spouse can also use any remaining RNRB - the same as the basic NRB
19
Q
When does a PET become fully exempt from IHT?
A
If the transferor survives 7 years from the date the PET was made
20
Q
Is IHT due when a PET is made?
A
No - IHT is only due if the pet fails
21
Q
Describe a LCT
A
All lifetime transfers of value made by a person into a trust on or after 22 March 2006 will give rise to a LCT
22
Q
When is tax owed on a LCT?
A
When the LCT is made, it is taxed at 20%
23
Q
Is further tax owed on a LCT if the transferor survives 7 years?
A
No - once 7 years has passed there is no further tax owed
24
Q
What happens if the transferor dies within 7 years of the LCT?
A
The LCT will be reassessed to tax at the death rate at 40% with reference to the NRB amount at the date of death
25
Death and transfer
When a person dies there is a deemed transfer of all the assets that they own at the date of their death - it is this deemed transfer that gives rise to IHT
26
Is the taxable estate the same as the succession estate?
No
27
Reassessment of PETc and LCTs on death
Any PETs and LCTs must be reassessed on the death to see if they fall subject to IHT
28
What is the cumulative total?
The total chargeable value of all chargeable transfers made in the previous 7 years
29
What is the purpose of cumulation?
Cumulation is used to prevent individuals reducing or avoiding IHT liability by making a series of dispositions
30
Explain cumulative total
Instead of viewing each PET or LCT in isolation, HMRC consider other chargeable transfers made in the 7 years before death prior to the transfer being taxed - the combined value is called the cumulative total
31
What is the effect of the cumulative total?
To reduce the NRB
32
How to calculate the available NRB?
Available NRB = full NRB minus cumulative total
33
What do exemptions and reliefs do for IHT?
They can be used to reduce or eliminate IHT
34
What is the 6 step formula to use when calculating IHT on failed PETs or LCTs?
1. calculate the cumulative total
2. identify value transferred
3. apply exemptions and reliefs
4. apply NRB and calculate tax
5. apply taper relief
6. give credit to tax paid in lifetime
(note 5 and 6 only apply when IHT is being calculated after death)
35
What is the 7 step formula to calculate IHT on the death estate?
1. calculate cumulative total
2. identify the assets included in the taxable estate
3. value the taxable estate
4. deduct debts and expenses
5. apply exemptions and reliefs
6. apply RNRB
7. apply basic NRB and calculate tax
36
How does the TNRB work?
When a married person died and some or all of the NRB is unused, the PRs of the surviving spouse can claim an increase in the survivors NRB to the unused percentage of the first spouses NBR - this is the transferable NRB
37
When is the TNBR available?
Only after the surviving spouse dies
38
Can a TNBR be used for any spouse, no matter when they died?
Yes the TNBR can be used for any spouse, even if they died before the TNBR was introduced
39
Multiple spouses and NBR
Individuals who have survived multiple spouses can claim the TNRB in respect of all of them, subject to a cap to 100% of the full NRB being transferred
40
Passing TNRB onto new spouses
Individuals can pass TNRB from a previous marriage to a new spouse (if applicable)
41
How to claim the TNRB?
No claim needs to be made when the first spouse dies
When the second spouse dies, the PRs have 2 years of the end of the month of death to claim the TNRB
42
How long to PRs have to claim the TNRB?
Either 2 years of the end of the month of death to claim the TNRB
Or within the first 3 months of the PRs acting (if this is later)
43
Must separate claims be made for individuals who are survived by more than one spouse for TNRB?
Yes separate claims for TNRB must be made for each spouse
44
When was the residential NRB introduced?
By Finance Act (no 2) 2015
45
When is the RNRB applicable?
1. when D died on or after 6 April 2017
2. their death estate included a qualifying residential interest
3. the QRI was closely inherited by a direct descendent
46
What is the position if only part of the QRI (the property) is closely inherited?
Then only the chargeable value which is closely inherited is taken into account when calculating the value of the RNRB
47
What is the full amount of the RNRB?
£175,000
48
What is the position if D's share or interest in a property is less than the RNRB?
If this is the case then the RNRB is capped at the value of Ds share in the property
49
How is the RNRB applied to the death estate?
The RNRB is applied to the death estate as a whole, rather than set off against the property as a gift separately
50
What is the tapered withdrawal of the RNRB for estates worth more than 2 million?
Where an estate has a net worth of more than 2 million, the RNRB is tapered - the reduction in the RNRB is £1 for every £2 over the 2 million threshold
51
What is the value of an estate that does not qualify for any RNRB?
Estates over £2,350,000 or more (or £2,700,000 where a full transferred RNRB applies)
52
What is a QRI?
A qualifying residential interest is a residential property interest which is part of Ds estate immediately before their death
53
What happens if D has more than one residential property (for QRI)?
The PRs must nominate one of the properties to be the QRI
54
What is a residential property interest?
An interest in a dwelling-house which D occupied was their residence at some point during their ownership
55
Can a residential property interest also include property that D did not live in?
Yes - only if they intended to live in it in due course
56
Does residential property interest include investment properties that D never lived in?
No it does not include residential investment properties
57
A QRI must be closely inherited for RNRB - what does closely inherit mean?
A beneficiary closely inherits by
- gift under the will
- operation of intestacy
- operation of survivorship
58
Will a beneficiary with a contingent interest closely inherit a property?
No this wouldn't fall as closely inheriting for the purpose of RNRB as they are not receiving an absolute interest
59
What is the meaning of direct descendants for RNRB?
- Ds children, grandchildren, great-grandchildren, lineal descendants
- spouse, CP of any of the lineal descendants
- widow, surviving CP of any lineal descendants who pre-deceased D, provided they do not remarry before D died
60
Who is not a direct descendant for RNRB?
Siblings, parents, nieces and nephews are not direct descendants
61
What are the downsizing rules for the RNRB?
1. D must have give away their QRI or downsized to a less valuable QRI on or after July 2015 (meaning they lost the benefit of the full RNRB)
2. a former home would have been a QRI if retained
3. a direct descendent inherits the replacement QRI and/or other assets
62
How is the downsizing amount calculated?
The amount of the addition is calculated with reference to the amount of the RNRB which would otherwise have been lost
63
When does the downsizing addition need to happen by?
The PRs must make a claim for the downsizing addition within 2 years of the end of the month of death
64
When is the downsizing addition relevant?
Only when there is no QRI or when the value of the new QRI is less than the current maximum RNRB
65
When are the downsizing rules not relevant?
They are not relevant if there is no loss of the RNRB because of any QRI value, or when the RNRB is not available because the new QRI is not left to a direct descendant
66
When calculating IHT on lifetime transfers on death estate- what exemptions and reliefs may apply?
- spousal exemption
- charity exemption
- family maintenance exemption
- annual exemption
-small gift allowance
- normal expenditure from income
-marriage exemption
-business property relief
- agricultural property relief
- taper relief
67
What is the annual exemption amount?
£3,000 per year - transfers up to £3,000 are not chargeable
68
Can you claim unused annual exemption relief?
Yes it can transfer over if unused from a previous year
69
Steps for applying NRB and calculating tax
a. establish the value of the NRB
b. reduce the total NRB by the cumulative total
c. apply 0% up to the NRB
d. apply the relevant rate to the rest to establish IHT
70
Does the residential NRB apply to lifetime transfers?
No never
71
What NRB is applied to LCTs?
The NRB amount applicable to LCTs when it is first made is the NRB at the date of the transfer
72
What NRB applied to failed PETs or LCTs?
The NRB that applies to failed PETs or LCTs is the NRB amount at the date of death
73
What are reassessed transfers?
PETs or LCTs made within the 7 years before the death
74
Are reassessed transfers calculated with IHT on the death estate?
No reassessed transfers are calculated separately
75
Do reassessed transfers form part of the death estate?
No - therefore any tax due on reassessed transfers is calculated separately from IHT on the death estate
76
If a reassessed transfer is made within 3 years of death, how much IHT is due on the transfer?
100% - no taper relief is applied
77
If a reassessed transfer is made within 3-4 years of death, what taper relief applies to IHT?
20% taper relief applied - 80% IHT paid
78
If a reassessed transfer is made within 4-5 years of death, what taper relief applies to IHT?
40% taper relief applied - 60% IHT paid
79
If a reassessed transfer is made within 5-6 years of death, what taper relief applies to IHT?
60% taper relief applied - 40% IHT paid
80
If a reassessed transfer is made within 6-7 years of death, what taper relief applies to IHT?
80% taper relief applied - 20% IHT paid
81
How do you 'give credit' for tax paid in lifetime on a LCT?
When an LCT is being reassessed, it must be factored what tax was paid in lifetime - this means you deduct the IHT previously paid from IHT that is due after taper relief has been applied
82
Cumulative total
The cumulative total is relevant do the death estate and tells us how much NRB is available - calculated by adding up all chargeable transfers made in the previous 7 years
83
Are assets in the taxable estate the same as the succession estate?
No not usually?
84
What assets make up the taxable death estate?
All jointly owned property
Property subject to reservation
DMC
Statutory nominations
Some interests in possession
85
What is the general rule for property that forms the taxable death estate?
The general rule is that all property which the deceased was beneficially entitled at the date of death is included in the taxable death estate - this would include UK property and property abroad
86
Jointly owned property in the taxable death estate - TIC
Where the property is held as TIC, the share passes into Ds estate for tax and distribution purposes
87
Jointly owned property in the taxable death estate - JTs
Where the property is held as JTs, the distribution of the property and tax position are considered separately
88
Taxable death estate - property owned subject to reservation
If a person gives an asset away during their lifetime but reserves a benefit in that asset, the value of the asset at the date of death will be included in the IHT estate
89
Taxable death estate - DMCs
IHT is owed on DMCs as they form part of the taxable death estate
90
Statutory nominations - what accounts can a person make written nominations into?
-friendly society
-industrial society
-provident society
91
What amount must a statutory nomination not exceed?
£5,000
92
Do statutory nominations form part of the succession estate?
No they pass automatically to the nominee - they may be distributed without a grant
93
Do statutory nominations form part of the taxable death estate?
Yes they do and are subject to IHT
94
Interest in possession trusts created after 22 March 2006
-after march 2006, if a life interest trust was created following a death by will, the capital value of the trust is included in their taxable death estate
95
Inter vivos life interest trusts and taxable estates
If an Inter vivos life interest trust is created (either during lifetime or after 22 march 2006) the life tenants interest is not included in their taxable estate
96
What assets are specifically excluded from the taxable death estate?
- excluded property
- insurance policies written in trust for a third party
- discretionary pension schemes
97
What is classed as excluded property from the taxable estate?
- remainder interest in a life trust
98
Discretionary pensions schemes and taxable estate?
If D was a member of an employer's pension scheme, any discretionary lump sum payment made by the pension fund trustees is not included in the taxable estate
99
Pension sums payable by right and the taxable estate
Any pension sums payable by right to the estate of D are included in the taxable estate
100
Insurance policies payable to Ds estate and taxable estate
Any insurance policies that are payable to Ds estate will form part of the taxable estate
101
Who is responsible for paying IHT on a LCT?
The donee is liable for IHT when the LCT is made
102
If the donor elects to pay IHT when making an LCT, what happens?
The value of the transfer is grossed up before the amount of IHT is calculated
103
Who is liable for IHT for failed PETs and reassessed LCTs?
The donee - and if they do not pay then the PRs of D are liable
104
Who is liable to pay IHT on the free estate?
The PRs - IHT is generally a testamentary expense payable from the residue of the estate unless otherwise directed by the will
105
Who is liable to pay IHT for gifts that do not pass to the PRs?
The burden lies with the recipient of the gift or the trustees of the trust
106
Is the entire IHT calculated for the whole estate then apportioned?
Yes the entire estate IHT is calculated then apportioned to different parts of the estate
107
Summary of IHT on LCTs
- LCTs are lifetime transfers into a trust
- immediately chargeable at 20% (lifetime rate)
- if T dies within seven years of making the transfer, the LCT is reassessed at 40% (but there is taper relief)
108
Summary of IHT on PETs
- PETs are lifetime transfers to an individual
- PETs are not chargeable when made, but become chargeable if T dies within 7 years
109
Summary of taper relief for failed PETs and LCTs
Taper relief reduces the amount of IHT payable - depending on if T survived within 3-7 years of the transfer being made
110
What exemptions and reliefs are available for lifetime transfers (failed PETs and LCTs)?
- annual exemption
- family maintenance exemption
- small gift exemption
- marriage exemption
- normal expenditure out of income
111
Explain the family maintenance exemption
Maintenance payments are not treated as transfers for IHT purposes if made to:
- a spouse or former spouse from divorce
- a minor child for maintenance, education or training
- a dependent relative to make reasonable provision for their care
112
Explain the small gift allowance
Small gifts of up to £250 per recipient can also be made free from tax - T can make as many small gifts as they like
113
Explain combining small gift allowance and annual exemption
The small gift allowance is not available if combined with the annual exemption - if T wishes to gift a person more than £250 this should be an annual exemption
114
Explain the marriage exemption
A gift given in consideration of marriage to a party of that marriage is exempt up to:
-£5,000 if made by a parent
-£2,500 if made by one party of the marriage to the other
-£2,500 if made by a remote ancestor (grandparent, great grandparent)
-£1,000 in any other case
Each parent can give £5000 - so the total combined would be £20,000
115
Explain normal expenditure out of income
A transfer value is exempt if made:
- from the donor's income
-as part of their normal regular patten of giving
-and does not affect their standard of living
There is no upper limit to this exemption
116
What is the spousal exemption?
All gifts between spouses during lifetime and on death are completely exempt
117
Does the spousal exemption apply to a life interest trust?
Yes if a spouse if left assets under a life interest trust the spousal exemption applies
118
Does the spousal exemption apply to a remainder interest?
No - if a spouse is a remainder beneficiary the spousal exemption does not apply
119
What is the charity exemption?
All transfers to a registered charity during lifetime and on death are exempt irrespective of the amount
120
Do charity gifts need to be immediate to qualify for the exemption?
Yes they must be immediate - cannot be in remainder
121
Other exemptions to be aware of
-political party exemption
-gifts of land to housing associations
-gifts for national purpose
-gifts to heritage maintenance fund
-gifts to employee benefit trusts
122
What do BPR and APR do?
They reduce the value of a transfer to the extent the asset transferred qualify for the relief
123
Explain business property relief
100% BPR applies in respect of all private company shares, partnership interest and a sole trader business
124
When does 50% BPR apply?
To quoted shareholdings provided the taxpayer has control of the company
125
When does APR apply?
For APR to apply, the property must have been occupied for agricultural purpose for at least 2 years if the owner occupied, or 7 years if someone else occupied
126
Can APR be claimed at 100% most of the time?
Ye APR of 100% of the agricultural value of the property can be claimed in most cases - however in the property was subject to tenancy before September 1995 only 50% ca be claimed
127
Which takes priority if both apply - BPR or APR?
APR
128
What are the two exemptions that are ONLY available on the death estate?
-woodlands relief
-quick succession relief
129
What is woodlands relief?
The woodlands relief is a deferral of tax on the value of the woodland until it is sold
130
What is quick succession relief?
QSR is a reduction in IHT following death where assets in Ds estate had been transferred to them within 5 years of their own death
and those assets has been subject to IHT at the time of transfer
