Inheritance Tax - Death Estate & Valuation Flashcards by Michael Agwu

diminution in value principle applies only when…

a lifetime transfer is made on PART of an asset, and the other part is kept by the transferror

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computation for the diminution in value principle?

value of estate before gift
less: value of estate after gift
= diminution in value

this calculates the diminution in value, which is used to calculate the value of a transfer when PART of the asset is transferred

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proceeds for a part transfer for CGT?

market value of the part transferred

different to IHT, for which we use diminution in value

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how do you calculate diminution in value?

value of estate before gift less value of estate after gift

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shares listed on the stock exchange are valued at..

at the lower of:
- the quarter up rule
- the average of the highest and lowest marked bargains on the day of transfer

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quarter up rule?

lower quoted price + 1/4*(higher quoted price - lower quoted price)

e.g., LQP = 55p, HQP = 60p
e.g., 55p + 1/4*(60p-55p) = 56.25p

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for CGT, how are quoted shares valued?

lower quoted price + 1/2(higher quoted price - lower quoted price)

e.g., LQP = 55p, HQP = 60p
e.g., 55p + 1/2(60-55) = 57.5

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related property?

this rule prevents taxpayers from avoiding IHT by splitting the ownership of assets to reduce the value of their estates

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where there is related property, the value is calculated as…

as a proportion of the total property held by both parties

e.g., 26m held by Bob, 20m held by his wife, Susan

e.g., 46m*(26m/46m) = 26m held by Bob

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for most property (other than shares) the value of property transferred when involving related parties is…

value of property * (transferor’s value / transferor’s value + value of related property)

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related property includes…

property included in the spouse’s estate
property transferred to a charity/political party

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do related property rules apply to CGT?

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related property rule amendment for shares?

for shares, the valuation is done using the number of shares, not the value

value of shareholding * (transferor’s no. of shares / total related shareholding)

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how to calculate value of shares transferred when involving related parties?

value of shareholding (£) * (transferor’s shares / total related shares)

e.g., value of 16,000 shares = £80,000, transferor’s shares = 2,000, total related shares = 16,000

80,000 * (2,000 / 16,000) = 10,000

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other valuation rules aside from diminution in value and related properties?

jointly owned property
unit trusts
life assurance policies

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jointly owned property?

where property is owned jointly a discount of 5-15% may be allowed from the full value of the interest

discount doesn’t apply where related property is held

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unit trusts?

value units in a unit trust at their bid price

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life assurance policies?

policy relates to…

individual’s life = include PROCEEDS in DE calculation

held in trust = do not include in DE - no IHT due

someone else’s life = market value (MV) used in DE calculation

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death estate consists of…

all assets which the deceased owned at death less debts less funeral expenses

assets - debts - funeral exp

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which debts can be deducted from death estate?

debts incurred prior to death (e.g., credit card)
taxes imposed by law (income tax / CGT)

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are gambling debts deductible from death estate?

unless legally enforceable

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charitable legacies at death rule?

death tax is automatically charged at 36% on the death estate if at least 10% of the net chargeable estate is left to charity

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net chargeable estate?

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value of estate after all reliefs, exemptions and NRB

i.e. taxable estate, without deducting the charitable legacy and RNRB

how to calculate net chargeable estate?

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taxable death estate + charitable legacy + RNRB

purpose of net chargeable estate?

to see if 10% test is met for charitable legacies to see if death tax is reduced to 36%

can you transfer unused NRB?

yes, the unused PROPORTION unused PROPORTION of the NRB at death of a spouse can be transferred to the surviving spouse when they die

increased NRB can be used for...

death tax for both lifetime transfers and death estate

RNRB?

residence nil rate band

how does the RNRB work?

if an individual leaves a RESIDENCE to a direct descendant (e.g., child, grandchild) or spouse of direct descendant (e.g., son in law) there's an RNRB to reduce taxable amount

figure for RNRB?

lower of: - 175,000 - net value of the property left to the direct descendants (MV less liabilities e.g., mortgage)

how and when is the RNRB tapered?

when = for estates valued at over £2m how = every £ above £2m is divided by 2 2m threshold is after deducting all liabilities & debts, but before deducting reliefs such as spouse or charity exemptions

can unused RNRB be transferred to a spouse, just like NRB?

yes, if the surviving spouse does the following: - leaves a home to direct descendants - includes a home in the estate

calculation for transferred RNRB?

limited to lower of: - net value of property left to direct descendants - 175,000 * (100% + unused %) unused RNRB must be tapered if first estate was >£2m

QSR?

quick succession relief reduces the inheritance tax payable on death estate if: - property had been acquired by the deceased person in 5 yrs before death - there was a charge to IHT on the first transfer

does QSR still apply where the asset is no longer held at date of death by the deceased?

yes

death tax computation?

GCT less: fall in value relief less: RNRB less: NRB =taxable amount death tax @ 40% taper % tapered amount due less: lifetime tax paid less: QSR =death tax payable

how is QSR calculated?

tax on first transfer * (increase in transferee estate / diminution in transferor's estate) * relevant %

how is the relevant % for QSR calculated?

0-1yrs = 100% 1-2yrs = 80% 2-3yrs = 60% 3-4yrs = 40% 4-5yrs = 20%

for QSR, if the first transfer was the entire estate...

- increase in the transferee's estate = amount actually received after inheritance tax has been paid - diminution in transferor's estate = chargeable estate (prior to IHT deduction)

how does QSR for a specific legacy work?

if the first transfer was a specific legacy: - the increase in the transferee's estate is the value of the legacy - the diminution in the transferor's estate is the value of the legacy + IHT borne on the legacy from the residue of the first estate

if not given the tax paid on first estate (for QSR), what is the formula?

QSR = tax paid on first estate * (net transfer / gross first estate) * relevant %

if an individual dies, and their spouse is domiciled overseas, is there an exemption?

yes, an exemption of 325,000 which is deducted from the death tax computation

when is 100% BPR available?

can get 100% BPR on: - shares in an unlisted company - a business or interest in a business

is CGT deductible in a death estate computation?

yes after adding assets, subtracting debts and funeral exp, you must deduct CGT liability on chargeable gains

GCT for CLTs? GCT for PETs?

CLT = lifetime tax paid + chargeable amount PET = GCT doesn't apply to PETs

is lifetime tax payable on PETs?

no, never

death tax is only due on...

transfers within 7 years of death both PETs and CLTs

what is a PET valued at for death tax?

chargeable amount

what is a CLT valued at for death tax?

gross chargeable amount lifetime tax paid + chargeable amount

exempt transferees?

- spouse - charities - political parties

exempt transferees are also...

related persons for IHT purposes

if we aren't told who pays the IHT for the lifetime transfer...

assume it's 25%

BPR rule for unquoted company?

100% relief if shares are in an unquoted company unless it's in an investment company or a company ceasing its trade

BPR rule for quoted company?

50% relief if you have a >50% shareholding

when calculating death estate, do you include charitable donations?

yes, include it, even though it is exempt the exemption will be deducted in the proforma

marriage exemption when spouse is not domiciled in UK?

325,000 is deducted from death estate (alongside debts & funeral expenses)

at death, can an individual use the unused proportion of their deceased spouse's NRB?

yes

Inheritance Tax - Death Estate & Valuation Flashcards

(57 cards)