Inheritance Tax Basics

Question 1

to be within scope of inheritance tax…

Answer 1

there must be a transfer of value of chargeable propery by a chargeable person

Question 2

what makes a person a chargeable person?

Answer 2

• if they’re uk domiciled
• if not uk domiciled, but have UK assets

Question 3

what are the two types of transfers of value?

Answer 3

transfers made when alive and transfers made when dead

Question 4

how are transfers valued?

Answer 4

using the diminution in value principle

considers the fall in value of the donor’s estate following the gift

usually equal to MV at the time of the transfer

Question 5

three stages of calculating inheritance tax?

Answer 5

1 - calculate chargeable amount
2 - calculating lifetime tax
3 - calculating death tax

Question 6

CLT?

Answer 6

chargeable lifetime transfer

a transfer made to a trust

Question 7

PET?

Answer 7

potentially exempt transfer

a transfer made to an individual which is exempt

exempt unless death occurs within 7 years of gift

Question 8

how is chargeable amount for IHT calculated?

Answer 8

transfer value less exemptions

Question 9

lifetime exemptions?

Answer 9

• small gifts exemption
• marriage/civil partnership exemption
• normal expenditure out of income
• annual exemption

Question 10

general exemptions?

Answer 10

exemptions which apply to transfers in life and on death

include transfers to spouse, charity or qualifying political parties

Question 11

small gifts exemption?

Answer 11

lifetime transfers <£250 are exempt per recipient per tax year

Question 12

marriage/civil partnership exemption?

Answer 12

gifts made when someone gets married are exempt

dependent on donor’s relationship to recipient

parent = 5,000 exempt limit
grandparent/ancestor = 2,500 exempt limit
party to the marriage = 2,500 exempt limit
anyone else = 1,000 exempt limit

Question 13

normal expenditure out of income?

Answer 13

a lifetime gift will be exempt if it:
- is a regular/habitual payment (e.g., payment of school fees)
- is made from donor’s income (not capital)
- doesn’t impact donor’s standard of living

Question 14

annual exemption?

Answer 14

3000 annual exemption every year

unused AE from prior year can be carried forward

Question 15

three types of lifetime transfer?

Answer 15

exempt
CLT
PET

Question 16

PET?

Answer 16

lifetime transfer that isn’t into a trust

IHT is chargeable on a PET only if it is made in the seven years prior to death

Question 17

CLTs?

Answer 17

transfer into trusts

Question 18

trust?

Answer 18

where assets are transferred and owned by a trustee, on behalf of the beneficiary

trustee = legal owner
beneficiary = beneficial owner

Question 19

NRB?

Answer 19

nil rate band

325,000 exempt amount before IHT becomes chargeable

Question 20

what was the NRB prior to 2009/10?

Answer 20

312,000

Question 21

lifetime tax rate?
trustees pay ….%?
donors pay …%?

Answer 21

lifetime tax rate is 20%

trustees pay 20%
donor pays 25%

Question 22

rule of thumb for IHT regarding donors and trustees?

Answer 22

generally, tax rules are more generous if trustees pay

e.g., trustees pay 20%, donors pay 25% for lifetime tax

Question 23

before the NRB is deducted, it must be reduced by the…

Answer 23

gross chargeable transfer value of any CLTs made in the seven years prior to the CLT we’re taxing

e.g., we’re taxing a CLT made in Nov2018, GCT of 200,000 for transfer made in Oct2012 (within 7 years) reduces the BRB to 125,000 (325,000-200,000)

Question 24

how is GCT calculated?

Answer 24

gross chargeable transfer

• if the trustees pay the tax, the GCT is the chargeable amount
• if donor pays the tax, the GCT is the chargeable amount + lifetime tax paid by the donor

Question 25

death tax is due on...

Answer 25

- the death estate - lifetime transfers within 7 years of the donor's death

Question 26

death estate?

Answer 26

all assets - liabilities left behind on the date of death

Question 27

do recipients pay death tax on lifetime transfers?

Answer 27

yes, on CLTs and PETs less than 7yrs before death

Question 28

are PETs outside the 7 years prior to death ignored?

Answer 28

yes, they're never subject to IHT

Question 29

death tax %?

Answer 29

40%

Question 30

taper relief for gifts made more than 3 years before death?

Answer 30

6-7 years = 20% 5-6 years = 40% 4-5 years = 60% 3-4 years = 80% apply this % on top of the 40% death tax

Question 31

is lifetime tax already paid deducted from death tax in respect to a particular CLT?

Answer 31

yes but this deduction cannot generate a repayment (capped at 0)

Question 32

transferee can claim to use a lower chargeable value on a CLT if...

Answer 32

- transferee still owns asset, but MV on death < MV at transfer date - transferee sold asset before death, and sale was below MV at transfer date

Question 33

does the reduction in value for fall in value relief alter the GCT value when calculating the available NRB?

Answer 33

no, GCT from lifetime tax remains constant

Question 34

does fall in value relief apply to chattels with < 50 years life (wasting chattels)?

Answer 34

no

Question 35

what determines the date the transferor or personal reps must provide HMRC with transfer details?

Answer 35

depends on the nature of the transfer

Question 36

personal representatives?

Answer 36

PRs executors appointed in the will or administrators estate if no will was made

Question 37

due date for transfers?

Answer 37

CLT = 12 months after end of month in which transfer occurred PET = 12 months after the end of the month in which the death occurred

Question 38

HMRC will issue a notice of determination showing the inheritance tax payable when...

Answer 38

the accounts are submitted or HMRC believes IHT is payable

Question 39

appeals must be made within...

Answer 39

30 days

Question 40

if inheritance tax account is submitted late to HMRC...

Answer 40

penalties apply

Question 41

due date and payer of lifetime tax on CLT between 6Apr and 30Sep

Answer 41

- paid by transferor - due date 30Apr in following year

Question 42

due date and payer of lifetime tax on CLT between 1Oct and 5Apr

Answer 42

- paid by transferor - due date within 6 months of the end of the month in which transfer was made

Question 43

due date and payer of death tax on CLT/PET/death estate

Answer 43

- paid by transferee/trustee/PRs - due date is six months after end of month in which death occurred or on delivery of accounts by PR (if earlier)

Question 44

how does payment of interest work for lifetime transfers?

Answer 44

interest runs from the due date to the day before the inheritance tax is paid

Question 45

how does payment of interest work for death estate?

Answer 45

interest runs from the 6 months after the end of the month of death to the day before inheritance tax is paid

Question 46

can payment by instalments be made?

Answer 46

yes an election can be made to pay in 10 equal instalments for: - lifetime tax on a CLT where the transferee pays the tax - death tax on CLT/PET where transferee still owns the property and transferor's death - death tax on the death estate

Question 47

when are lifetime tax instalments due?

Answer 47

on the date the whole amount would've been due

Question 48

when are death tax instalments due?

Answer 48

at the end of the 6 months following the date of death

Question 49

if property is sold, what happens to the payment due date?

Answer 49

inheritance tax is due immediately

Question 50

on which assets are interest-bearing instalments available?

Answer 50

- shares/securities - businesses and interests in businesses - land

Question 51

what happens when instalment payments are late?

Answer 51

interest will accrue from the due date to the day before payment is made