Inheritance Tax

Question 1

IHT is charged at the following rates:

Answer 1

• 0% on estate under the nil rate band (NRB) of £325,000
• 20% on chargeable lifetime transfers (gifts into certain trusts)
• 40% on estate over NRB (36% where 10% of net estate left to charity.

IHT is payable on the worldwide assets of those domiciled and deemed domicile (15/20 tax years resident in UK) and on the UK assets of non doms.

Question 2

IHT - loss to the estate principal:

Answer 2

• When calculating the value of an item for IHT purposes, the loss to the estate principal is used.
• Losses to the estate include failing to exercise a right, such as not collecting a debt or making gifts.
• Repayment of loans or commercial transactions that take place at arm’s length are not deemed to be losses to an estate.
• If a transaction takes place at undervalue (not at arm’s length) the figure to use for IHT purposes will be the loss to the estate rather than price paid.

Question 3

IHT - Legal Personal Representative + Grant of Representation:

Answer 3

• The Legal Personal Representative is responsible for payment of tax of the estate within 6 months after the end of the month in which death occurs.
• The Grant of Representation to administer the estate cannot be obtained until accounts have been delivered and IHT paid.
  
  • This is issued by the Probate Registry.
  • Personal Representative has the legal authority to do things like access the deceased’s bank account, sell their property and distribute their Estate to the beneficiaries.

Question 4

IHT and other taxes- Income tax and capital gains tax:

Answer 4

• Income tax is owed on any income receied up to date of death, usual allowances and reliefs can be claimed by PR.
  
  • Personal allowance available in full, even if die early in tax-year).
• Income received after date of death, no personal allowances, all charged at basic rate (8.75% divs, 20% all other income.
• CGT due at higher rates on disposals by PRs on any post-death gain, AEA amount available for year of death and following 2 tax years.
  
  • Transferring assets to a beneficiary is not a disposal.
  • Property disposal where property was used by beneficiary of estate as main res before and after death exempt if entitled to minimum 75% of proceeds at disposal.
• PRs can claim for capital losses made in year of death up to date of death to be carried back against gains in three preceeding tax years (later years used first).

Question 5

Transfers exempt from IHT during lifetime:

Answer 5

• Annual exemption -
  
  • £3,000 per tax-year. Can be carried forward if not used. Providing the current tax-years annual exemption used first.
• Small gifts
  
  • £250 per recipient per tax year - cannot be combined with annual exemption.
• Marriage/ civil partnership
  
  • £5,000 to children
  • £2,500 to grandchildren, between spouses
  • £1,000 to anyone else
• Normal expenditure out of income
  
  • cannot be capital distributions i.e. from capital content of PLA and withdrawals from investment bond.

Question 6

Transfers exempt during lifetime and/ or on death - spousal exemption:

Answer 6

• Spousal exemption
  
  • Limited to £325,000 for a non-UK domiciled spouse, unless they elect to be UK domiciled for IHT purposes.
  • An election can be made during lifetime (irrevocable while remaining UK res, though if outside the UK more than 4 consecutive TYs, ceases to apply) - or on death.
  • Can apply from any date within the previous 7 years (covers previous gifts)
  • Election after death must be made within 2 years.

Question 7

Transfers exempt from IHT during lifetime and/ or death:

Answer 7

• Education and maintenance
  
  • Maintenance payments to spouse unlimited
  • Until TY child turns 18/ leaves full-time education.
• UK charities
  
  • Must be registered with the UK charity commission
• UK political parties
  
  • 2 elected MPs/ 1 MP and 150,000 votes
• Gifts for national benefit
  
  • National Trust, museums, libraries, housing associations
• Death as a result of active service
  
  • The entire estate is free of IHT where death is caused by being on active service (death can occur many years in the future).
  • Includes armed services, emergency services, and humanitarian aid workers.

Question 8

IHT - Deed of Variation - key points:

Answer 8

• To be effective for IHT purposes:
  
  • Must refer to the will or intestacy being varied
  • Must be done within 2 years of death
  • Must contain a statement that the variation is to have effect for IHT purposes
  • Must be signed by all making the variation
  • Must be no consideration
• If all are fulfilled, the original recipient is not treated as making a transfer of value for IHT
• Effectively the will or intestacy is re-written

Question 9

Joint property - treatment for IHT:

Answer 9

• Joint tenants - survivor inherits
• Tenants in common - deceased share passes according to will/ intestacy

Question 10

Dying simultaneously - for IHT purposes:

Answer 10

• General law presumes eldest died first
• IHT presumes died at same time

Question 11

Potentially Exempt Transfers (PETs) - key points:

Answer 11

• Lifetime transfer by an individual to:
  
  • another individual
  • bare trust
  • trust for vulnerable person
• No tax at date of gift
• No requirement to report to HMRC
• If donor survives 7 years, gift becomes fully exempt
• Death within 7 years becomes chargeable
• PET valued at date of gift

Question 12

Taper relief - key points:

Answer 12

• 0-3 Years
  
  • 100%
• 3-4 years
  
  • 80%
• 4-5 years
  
  • 60%
• 5-6 years
  
  • 40%
• 6-7 years
  
  • 20%

Taper relief reduces the amount of tax payable, not the value of the transfer.

When PETs become retrospectively chargeable, they use up the NRB - this increases the tax due on the estate

Question 13

Residence nil rate band - key points:

Answer 13

• Introduced 6 April 2017
• Worth £175,000 in 2022/23.
• Available when an individual’s main residence is left to direct descendent (e.g. child, grandchild, spouse/ partner of child/ grandchild).
• Available where individual downsized/ ceased to own home after 7 July 2015 and left assets of equivalent value to direct descendent.
• RNRB is transferable if unused in full on the first death of a spouse or civil partner where 2nd death occurs after 6 April 2017.
• Estates with net value over £2m will see the residence nil-rate band reduced by £1 for every £2 over £m threshold.

Question 14

Potentially Exempt Transfers (PETs) - key points:

Answer 14

• Lifetime transfers made from one person to another, or to a bare trust or a disabled trust
• No need to inform HMRC (though worth making a note of the gifts)
• Becomes fully exempt if the donor survives 7 years
• Chargeable if the donor dies within seven years of making the gift and value of PET exceeds available NRB.
• The value of PET is usually the value at the date of the gift
  
  • If the value has reduced since gift/ wasting asset it is the market value at DOD.
• Taper relief is available

The recipient of PET pays tax due, if refused, the PRs will be asked to pay.

Question 15

Life assurance to protect recipients of PET - how does this work?

Answer 15

• 7 year decreasing term assurance to protect recipient of PET/ CLT (gift inter vivos/ multi-benefit policy to achieve this).
• 7-year LTA to protect the estate from loss of NRB while PET/CLT active, written under trust for beneficiaries of the estate and LPRs as trustees.
• Any outstanding liability on estate SL/JL2D policy written under trust for the amount of liability.
• Premiums payable on such life policies can use annual exempt amount/ normal expenditure option.

Question 16

Chargeable lifetime transfers (CLT):

Answer 16

• Lifetime transfers made to trusts (other than bare or disabled)
• Immediately chargeable to IHT at the lifetime rate of 20% if the value of the transfer takes the donor’s cumulative total transfers over the past seven years over the value of the NRB.
• If the donor dies within seven years the value of the CLT comes back into the estate and is taxed at the death rate (40%) with credit given for tax paid during their lifetime (if any) plus taper relief (in exactly the same way as for PETs).
• No refund will be given where tax has been overpaid.

Question 17

Chargeable Lifetime Transfer - example of taxation:

£375,000 gift to a discretionary trust. No previous gifts.Death 3.5 years later.

Answer 17

• Tax at date of gift
  
  • £375,000 - £6,000 (2 x annual exemptions, current and previous tax year) = £369,000.
  • £369,000 - £325,000 = £44,000
  • £44,000 at lifetime rate of 20% = £8,800.
• Tax on death
  
  • £369,000 - £325,000 = £44,000
  • £44,000 at death rae of 40% = £17,600
  • Death 3.5 years after gift so only 80% IHT payable. £17,600 @ 80% = £14,080.
  • Deduct tax paid during lifetime £14,080 - £8,800 = £5,280.
• Lifetime tax is normally due 6 months after the end of the month in which the CLT is made.
• However, if it is made between 5th April and 1st October, then it is due by 30th April the following year.

Question 18

Combining CLTs and PETs - key points:

Answer 18

• When looking to see if there is lifetime tax to pay on a CLT we look back 7 years to see if there have been any other CLTs. Ignore any PETs.
• However, on death, failed PETs (those within 7 years of death) become chargeable and can no longer be ignored.

Question 19

IHT Reliefs - Business Relief - Key points:

Answer 19

• Relief for transfers of business property that has been owned for, used in, or earmarked for future use in the business at least two years prior to transfer. Only applies to certain types of business (not those who deal mainly in shares, land, or property generally).
• Not applicable if the business property is subject to a binding contract for sale at the time of transfer.
• 100% BR for unincorporated businesses or shareholdings in unquoted/ AIM companies.
• 50% BR for controlling shareholdings in fully listed companies, or land, buildings, plant, or machinery used in a business controlled by the person doing the transfer.
• Not available on assets not used in business for the last 2 years, cash, or property subject to a binding contract of sale.
• Mortgage secured on the business property should be tranferred to main res if possible.

Question 20

IHT Reliefs - Agricultural Relief - Key points:

Answer 20

• Available for land, crops and buildings but not animals or equipment. (Pick farm up and turn upside down - everything that fell of wouldn’t get AR - may get BR instead!).
• Relief on the agricultural value of land, not development value not buildings on their own.
• No agricultural relief on the excess open market value of a farmhouse over its agricultural value.
• 100% AR for owner-occupied farms and farm tenancies.
• 50% AR for landlord with interests in let farmland which extends to 100% BR if tenancy more than 12 months. (and started post 31 August 1995)
• Must have been owned for agricultural purposes for 2 years, or 7 years if let out during the period.
• No binding contract of sale as per BR.
• If AR and BR apply - AR given first.

Question 21

IHT Reliefs - Post mortem relief - key points:

Answer 21

• If shares sold within 12 months of death; or
• Property sold within 4 years of death.
• Is sold for less than the valuation at date of death, IHT is calculated on the disposal proceeds not at DOD.
• This applies to all shares/ property sold not just those sold at a loss.

Question 22

IHT Reliefs - Woodlands Relied - Key points:

Answer 22

• Only applicable to timber (land would probably qualify for AR).
• Only for transfers on death and only defers IHT until disposal of timber although the nature of the business would mean the whole woodland would get BR anyway.

Question 23

IHT Reliefs - Quick Succession Relief - Key points:

Answer 23

• QSR is available on inherting something and then die within 5 years.
• Part of your estate is deemed to consist of an inheritance on which IHT has only recently been paid.
• Relief only applies to the tax on the net interest in the estate of the second person.
• Formula is:
  
  • (Tax paid on first transfer x net transfer) / gross transfer
  • x relevant %

Question 24

Quick Succession Relief example:

Answer 24

Sam died May 2018, left all of her estate, £400,000 to her friend Ernie. The IHT paid on Sam’s estate was £30,000. Ernie died in April 2020 leaving a £600,000 estate. No direct descendants.

• Ernie’s estate - NRB (£600,000 - £325,000)
  
  • £275,000
  • @ 40% = £110,000 IHT

As Ernie died within 2 years of Sam. QSR applies and credit due as follows:

• (£30,000 x (£400,000 - £30,000)) / £400,000
  
  • = £27,750
• QSR Taper = 80% as Ernie’s death was between 1 and 2 years of Sam’s.
  
  • £27,750 @ 80% = £22,200
• Total IHT on Ernie’s estate =
  
  • £100,000 - £22,200
  • = £87,800

Question 25

Normal expenditure exemption - key points:

Answer 25

• Lifetime transfer exempt if:
  
  • Made as part of the transferor’s normal expenditure
  • It was made out of income; and
  • After allowing for all transfers forming part of normal expenditure, did not impact the trasnferor’s standard of living

Question 26

Normal expenditure exemption - Bennet v. IRC (1995) - key points:

Answer 26

• Donor instructed trustees to pay donees any trust income that was surplus to requirements.
• Result was that two annual payments of £9,300 and £60,000 made
• Court held that this was normal expenditure as precise instruction given to trustees established that the very different amounts formed the pattern of normal expenditure from income.
• The payments did not reduce the donor’s standard of living.