Inheritance Tax - Lifetime Transfers Flashcards
(29 cards)
What are the six steps for calculating IHT on lifetime transfers?
Calculate cumulative total
Identify value transferred
Apply exemptions and reliefs
Apply NRB and calculate tax
Apply taper relief [if after death]
Give credit for tax paid in lifetime [if after death]
What are the seven steps for calculating IHT on the death estate?
Calculate cumulative total
Identify assets included in the taxable estate
Value the taxable estate
Deduct debts / expenses
Apply exemptions and reliefs
Apply RNRB
Apply basic NRB and calculate tax
What is the lifetime tax rate on an LCT?
20%
What happens if someone who has made an LCT dies within 7 years?
LCT is reassessed to tax at the death rate of 40%
How do you calculate the cumulative total?
Add up all the chargeable transfers made in the 7 years prior to transfer
How do you identify the value of a PET or LCT?
Loss in value to the donor at the rate of the transfer
How does the annual exemption work?
3k a year - you can roll over any part of the previous year’s AE also up to £6k
How does taper relief work? What are the relevant rates?
Applies to transfers made 3-7 years before death - tapers off the allowance
if the transfer is 0-3 years before death - 100% of tax is payable
if it is 3-4 years before death - 80%
if it is 4-5 years before death - 60%
if it is 5-6 years before death - 40%
if it is 6-7 years before death - only 20% of the 40% rate tax calculated is payable
How should you give credit for tax paid in lifetime on a reassessed LCT?
Deduct IHT paid previously from that due as a result of death
What is the general rule on who bears the burden of IHT for individual assets
The donee is liable to pay the IHT
if this is an LCT - the payment of IHT is made using the trust fund
Who will become liable for IHT if the recipient of a lifetime gift does not pay the IHT due within 12 months from the end of the month of death
Deceased’s PRs will become liable
Where is IHT paid from on the succession estate / intestacy?
General testamentary and administration expense - PRs are liable to pay this
IHT will be paid from the residue, unless a contrary intention appears in the will
When will a contrary intention that something other than the residue bears the IHT burden be shown?
No prescribed wording, would be a matter of construction of the terms of the particular will under consideration - must be done clearly
What is the family maintenance exemption?
Maintenance payments are not treated as transfers for IHT purposes if made to:
* Spouse / former spouse
* Minor child of either party to a marriage for maintenance, education, training
* Maintenance to children over 18 in full time education or training
* Dependent relative to make reasonable provision for care
o Care: payments to cover provisions of services covered
What is the small gifts allowance?
- Up to £250 per recipient
- T can make as many small gifts that it would like – no limit to number of recipients
- Not available if combined with any other exemption – including AE
- If T wants to make a gift of over £250 to anyone – they should rely on the AE instead
- If gifts to any one person in the same tax year exceed £250 – exemption does not apply at all for that donee
What is the marriage exemption?
A gift given in consideration of a marriage to a party of that marriage is exempt up to:
* £5,000 if made by a parent of one of the parties
* £2,500 if made by one party of the marriage to the other
* £2,500 if made by their remoter direct descendant
* £1,000 in any other case
Child includes illegitimate / adopted / step
Gift must be made in relation to a specific marriage
Relief applies per donor in respect of a marriage – so if both parents of both parties in a couple – could claim relief of £20,000
How does the normal expenditure out of income exemption work?
Transfer of value is exempt if made
* From the donor’s income – not capital
* As part of a normal / regular pattern of giving
* Do not affect the donor’s standard of living
No upper limit to this exemption question of fact whether requirements are fulfilled
How does the spouse exemption work?
If the donor is UK domiciled, no limit to the amount that can be claimed
What is the effect of the charity exemption?
If you donate 10% or more of your net estate to charity, a reduced IHT rate of 36% not 40% applies to the taxable portion of the estate
What might be sensible tax planning advice regarding Business Property Relief?
Buying unquoted shares (e.g. AIM) - good way to turn non-exempt cash into an exempt asset
Who is the normal expenditure out of income useful for?
High income cash rich clients - proof of all payments will be needed
What should you do if you have been instructed by someone and realise that you doubt their testamentary capacity?
Consent should be obtained to approach medical practitioner for confirmation of capacity and to make a record of the findings
If capacity confirmed - will can be made but it is advisable to ask doctor to act as a witness and to record their findings
If capacity cannot be confirmed - will should not be prepared
What is the only kind of will you can make if someone lacks testamentary capacity?
Statutory will under S16 Mental Capacity Act, after an application to the Court of Protection
How should you approach any gift to a solicitor in a will?
You should refuse to act for a client where the client is proposing to make a gift of a significant value to you or your member of your family / member of your firm / their family unless client takes independent legal advice
