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Inheritance Tax Flashcards

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1
Q

What is the primary aim of Inheritance Tax (IHT)?

A

To impose a tax liability on estates at the time of death

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2
Q

What are the three main occasions when IHT may be charged?

A
  • Death
  • Lifetime gifts made within seven years prior to death
  • Lifetime gifts to a company or into a trust
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3
Q

What is a ‘potentially exempt transfer’?

A

A transfer made during life that is not chargeable to IHT unless the transferor dies within seven years

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4
Q

What is the definition of ‘chargeable transfer’ under IHTA 1984?

A

A transfer of value made by an individual that is not an exempt transfer

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5
Q

List the steps to calculate IHT.

A
  • Identify the transfer of value
  • Find the value transferred
  • Apply any relevant exemptions and reliefs
  • Calculate tax at the appropriate rate
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6
Q

What is the nil rate band for IHT in 2024/25?

A

£325,000

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7
Q

What is the residence nil rate band for IHT in 2024/25?

A

£175,000

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8
Q

What is ‘cumulation’ in the context of IHT?

A

The process of looking back over the seven years preceding a transfer to determine the available nil rate band

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9
Q

How is a person’s estate defined for IHT purposes?

A

All property to which the deceased was beneficially entitled immediately before death, excluding ‘excluded property’

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10
Q

What is a ‘qualifying interest in possession’?

A

An interest under which the beneficiary is entitled to claim the income from the trust property without any power of the trustees to withhold it

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11
Q

What happens to property given away during lifetime but subject to a reservation at the time of death?

A

The donor is treated as being ‘beneficially entitled’ to the property for IHT purposes

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12
Q

True or False: Excluded property is included in the estate for IHT purposes.

A

False

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13
Q

What are the basic valuation principles for assets in the estate?

A

Assets are valued at the price they might fetch if sold in the open market immediately before death

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14
Q

How is the value of quoted shares determined for IHT?

A

From the Stock Exchange Daily Official List for the date of death, calculated as one-quarter of the difference between the lower and higher price added to the lower price

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15
Q

What types of debts can be deducted for IHT purposes?

A
  • Debts incurred for money or money’s worth
  • Reasonable funeral expenses
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16
Q

What is the spouse or civil partner exemption under IHTA 1984?

A

A transfer of value is exempt if it passes to the deceased’s spouse or civil partner

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17
Q

Fill in the blank: A lifetime gift to a company or into a trust is immediately ______ to IHT at the time when it is made.

A

chargeable

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18
Q

What is the rule regarding qualifying interest in possession trusts for spouse exemption?

A

IHT is charged as if the person with the right to income owned the capital for both creation of the trust and on the death of a life tenant

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19
Q

What is the rule applicable to qualifying interest in possession trusts regarding IHT?

A

IHT is charged as if the person with the right to income owned the capital

This applies for spouse exemption on creation of the trust and on the death of a life tenant.

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20
Q

Who does the spouse exemption apply to?

A

Spouses and civil partners

It does not apply to cohabitants, regardless of relationship duration.

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21
Q

What was the outcome of Holland (Executors of Holland Deceased) v IRC?

A

The court did not recognize the female partner as a spouse for tax exemption purposes

The male partner’s estate was £640,000, and IHT payable was £180,000.

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22
Q

What does Section 23(1) of IHTA 1984 state about charity exemptions?

A

Transfers of value to charities are exempt to the extent that the values transferred are attributable to property given to charities.

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23
Q

What can affect the tax rate on the rest of the death estate when large charity gifts are made?

A

The transfer itself is exempt, and it may lower the tax rate on the remaining estate.

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24
Q

What is Business Property Relief (BPR)?

A

BPR reduces the value transferred by a transfer of value of relevant business property by a certain percentage.

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25
What types of property qualify for a 100% relief under BPR?
Transfers of value attributable to: * a business or an interest in a business * company shares not listed on a stock exchange.
26
What percentage relief is allowed for company shares listed on a recognized stock exchange under BPR?
50% relief is allowed if the transferor had voting control before the transfer.
27
What is the time limit for assets to qualify for BPR?
Assets must have been owned by the transferor for at least two years at the time of transfer.
28
What does Agricultural Property Relief do?
It reduces the agricultural value of agricultural property by a certain percentage.
29
What is the definition of 'agricultural value'?
Value of the property if subject to a perpetual covenant prohibiting its use other than for agriculture.
30
What is the Nil Rate Band (NRB) for IHT?
The first £325,000 of the estate is taxed at 0% if no chargeable transfers were made in the seven years prior to death.
31
What tax rate applies to the estate exceeding the NRB?
40% tax rate applies to the excess amount.
32
What is the special rate of 36% in IHT?
It applies when at least 10% of a defined component of the net estate passes to charity.
33
What is the Residence Nil Rate Band (RNRB)?
An additional allowance available for deaths after 6 April 2017, currently set at £175,000 for 2024/25.
34
What qualifies as a 'qualifying residential interest' for RNRB?
An interest in a dwelling house that has been the deceased's residence and is part of the estate.
35
Who can RNRB pass to for it to be considered 'closely inherited'?
It must pass to: * a child, grandchild, or other lineal descendant * the current spouse or civil partner of a lineal descendant.
36
What happens to RNRB for estates valued at £2 million or more?
The RNRB is reduced by £1 for every £2 over the £2 million threshold.
37
What is a Potentially Exempt Transfer (PET)?
Any gift made by an individual to another individual or into a disabled trust that would otherwise be chargeable.
38
What is included in the definition of 'transfer of value'?
Any lifetime disposition made by a transferor that reduces the value of their estate.
39
What are some exclusions from the definition of 'transfer of value'?
Transfers for the maintenance, education or training of children or dependent relatives.
40
How is the value transferred calculated in a lifetime transfer?
It is the amount by which the value of the transferor's estate is less than it would have been but for the transfer.
41
What happens if a lifetime transfer is made but the transferor dies within seven years?
The business property relief given at the time will be withdrawn unless the property is still owned at the time of the transferor's death.
42
What is the order of application of exemptions and reliefs?
Spouse or civil partner and charity exemptions are applied before reliefs.
43
What are 'lifetime only' exemptions?
Exemptions that apply only to lifetime transfers and may apply to only part of a transfer.
44
What exemptions are applied before reliefs in lifetime transfers?
Spouse or civil partner and charity exemptions ## Footnote These exemptions make the transfer wholly exempt.
45
What is the annual exemption amount for lifetime transfers?
The first £3,000 transferred in each tax year ## Footnote Unused exemptions may be carried forward for one year, allowing a maximum of £6,000.
46
What is the exemption for small gifts in a tax year?
Lifetime gifts of £250 or less to any one person are exempt ## Footnote This exemption cannot be combined with gifts exceeding £250.
47
What criteria must be met for normal expenditure out of income to be exempt?
* Made as part of the transferor's normal expenditure * Made out of the transferor's income * Transferor maintains usual standard of living ## Footnote An example includes regular payments to support a child at university.
48
What are the exemption limits for gifts made in consideration of marriage?
* £5,000 by a parent * £2,500 by a remoter ancestor * £1,000 in any other case
49
What is a potentially exempt transfer (PET)?
Any value remaining after exemptions and reliefs have been applied, becoming chargeable only if the transferor dies within seven years ## Footnote Surviving seven years makes the transfer exempt.
50
What is a lifetime chargeable transfer (LCT)?
Any lifetime transfer that does not qualify as a PET ## Footnote Common examples include transfers to discretionary trusts.
51
What tax rates apply to lifetime chargeable transfers (LCTs)?
* 0% on the first £325,000 (nil rate band) * 20% on the balance of the chargeable transfer
52
How do chargeable transfers made in the seven years before a current chargeable transfer affect the nil rate band?
They reduce the nil rate band available for the current transfer.
53
What happens to potentially exempt transfers if the transferor dies within seven years?
They become chargeable and the transferee is liable for any IHT payable.
54
What is tapering relief for potentially exempt transfers (PETs)?
Available if the transferor survives more than three years after the transfer, reducing tax payable ## Footnote The relief reduces tax based on how many years before death the transfer occurred.
55
What is the effect of death on lifetime chargeable transfers (LCTs)?
IHT payable must be recalculated and may increase due to PETs becoming chargeable.
56
How is the cumulative total for a PET determined?
It includes any LCTs made in the seven years before the PET and any PETs that became chargeable due to the transferor's death.
57
What happens to the nil rate band when calculating tax on LCTs after the transferor's death?
The cumulative total of other LCTs and PETs that became chargeable will determine the available nil rate band.
58
When does credit for IHT already paid apply after recalculating tax on LCTs?
It applies if more than three years have elapsed between the transfer and the transferor's death.
59
What is the maximum exemption amount that may be available when carrying forward unused annual exemption?
£6,000
60
True or False: A transfer becomes chargeable if the transferor survives for seven years after making a potentially exempt transfer.
False
61
Fill in the blank: A lifetime transfer is exempt if it is shown that it was made as part of the transferor’s _______.
[normal expenditure out of income]
62
What happens to a transfer if the transferor dies within seven years of making a potentially exempt transfer?
It becomes chargeable and must be reassessed for IHT.
63
What is the nil rate band for inheritance tax (IHT)?
£325,000 at 0% ## Footnote The nil rate band is the threshold below which IHT is not charged.
64
What is the further tax payable by trustees after George's death?
£6,000 ## Footnote This amount is calculated after applying tapering relief.
65
Who is liable to account for the payment of IHT?
PRs and trustees ## Footnote PRs are personal representatives and trustees hold property in a representative capacity.
66
What does the term ‘estate rate’ refer to?
Average rate of tax applicable to each item of property in the estate ## Footnote It helps determine the tax attributable to particular items.
67
How is the estate rate calculated?
Tax bill / total chargeable estate × 100 ## Footnote This gives the percentage of tax applicable to the estate.
68
What are the PRs liable to pay IHT on?
Property not in a settlement and joint property ## Footnote This includes property that passes under the deceased’s will or intestacy.
69
True or False: The liability for IHT cannot be varied by the testator.
True ## Footnote The statutory rules on liability cannot be altered.
70
What additional liability do PRs have if tax remains unpaid after 12 months post-death?
PRs become liable for the tax ## Footnote This includes tax on gifts made during the deceased's lifetime.
71
What happens to the tax liability if the transferor dies after making a lifetime chargeable transfer?
The transferee is primarily liable, but PRs can become liable if unpaid ## Footnote This applies to Potentially Exempt Transfers (PETs).
72
What is the instalment option in relation to IHT?
Tax on certain properties can be paid in 10 yearly instalments ## Footnote This option applies to land, business interests, and certain shares.
73
When is IHT due for payment following a death?
Six months after the end of the month of death ## Footnote PRs usually pay earlier to expedite estate administration.
74
What is the general anti-avoidance rule (GAAR)?
A rule to counteract abusive tax arrangements ## Footnote GAAR allows HMRC to challenge arrangements deemed exploitative.
75
What does DOTAS stand for?
Disclosure of Tax Avoidance Schemes ## Footnote This regulation requires disclosure of certain tax avoidance schemes to HMRC.
76
Fill in the blank: The burden of IHT can be decided by the _______.
[transferor] ## Footnote The transferor can choose who bears the burden of tax, such as transferees or themselves.
77
What is the tax rate applied if the nil rate band is exhausted?
40% ## Footnote This rate applies to the value exceeding the nil rate band.
78
What is the primary liability for IHT on lifetime chargeable transfers (LCTs)?
The transferor is primarily liable ## Footnote However, trustees may also be claimed against by HMRC.
79
What is the consequence of selling instalment option property?
All outstanding tax and interest becomes payable ## Footnote This applies upon sale of property subject to the instalment option.
80
True or False: HMRC typically claims tax from the recipient of property.
False ## Footnote Tax is usually paid by PRs, not directly from beneficiaries.
81
What is the effect of a will being silent on the burden of IHT?
IHT on property vests in PRs is payable as a testamentary expense ## Footnote The default position dictates who pays unless specified otherwise.
82
What is a Potentially Exempt Transfer (PET)?
A gift that may become chargeable if the donor dies within seven years ## Footnote PETs can affect the IHT liability of the estate.
83
What is the primary purpose of the General Anti-Avoidance Rule (GAAR)?
To enable HMRC to counteract 'abusive' tax arrangements ## Footnote GAAR is a mechanism designed to prevent tax avoidance strategies that exploit loopholes in tax laws.
84
What conditions must be met for an arrangement to be considered a 'tax arrangement' under GAAR?
The obtaining of a tax advantage must be the main purpose (or one of the main purposes) of the arrangement ## Footnote This definition highlights the focus on the intention behind the arrangement.
85
What is the 'double reasonableness test' in the context of GAAR?
An arrangement is 'abusive' if it cannot reasonably be regarded as a reasonable course of action ## Footnote This test assesses both the intention and the reasonableness of the actions taken.
86
Who bears the burden of proof to show that an arrangement is abusive under GAAR?
It is for HMRC to show that an arrangement is abusive ## Footnote This places the onus on the tax authority to demonstrate the abusive nature of the arrangement.
87
What may HMRC do if a taxpayer claims a tax advantage under a scheme that violates GAAR?
HMRC may counteract the advantage and impose a penalty if appropriate ## Footnote This serves as a deterrent against engaging in abusive tax arrangements.
88
Fill in the blank: GAAR is intended to counteract '_______' tax arrangements.
'abusive' ## Footnote 'Abusive' refers to arrangements that exploit tax laws for undue benefits.
89
True or False: An arrangement can be considered a tax arrangement under GAAR even if obtaining a tax advantage is not one of its main purposes.
False ## Footnote The main purpose (or one of the main purposes) must be obtaining a tax advantage for it to qualify.

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