Inheritance tax & the business relief exemption

Question 1

Are all transfers of value made by an individual chargeable to inheritance tax (IHT)?

Answer 1

Yes - unless exempt.

Question 2

What are the three kinds of transfer (IHT trigger events)?

Answer 2

1) Potentially Exempt Transfers (PET) - made by a person during their life

2) Lifetime Chargeable Transfers (LCT) - made by a person during their life

3) Death

Question 3

What is a Potentially Exempt Transfer (PET)?

Answer 3

A transfer of value made by a person during their lifetime to another individual
eg. a parent who gives their child a £10,000 contribution towards a deposit on a flat.

Question 4

What is a Lifetime Chargeable Transfer (LCT)?

Answer 4

A transfer of value made by a person into a trust during their lifetime on or after 22 March 2006.

Question 5

What gives rise to the Inheritance Tax (IHT) charge on death?

Answer 5

When a person dies, there’s a deemed transfer of all the assets that they own at the date of their death - this deemed transfer gives rise to the IHT charge on death.

Question 6

PETs & LCTs - what is the relevant value for a lifetime transfer?

Answer 6

The amount by which the transferor’s estate is reduced, rather than the face value of the asset or the amount the transferee gains

for example - if the transferor gives away one item out of a complete set, the loss to the transferor may be more than the value of the one item given away.

Question 7

Death - what is property in the taxable estate valued at?

Answer 7

The price it might reasonably be expected to fetch if sold on the open market immediately before the death.

Question 8

When are the rates of IHT set?

Answer 8

Annually - by the budget for the tax year which runs from 6 April to 5 April.

Question 9

What are the rates for the current tax year?

Answer 9

£0 - £325,000 = 0% (the nil rate band (NRB)
NRB may be higher/lower in certain situations

Above the NRB - 40% (death rate); or - 20% (lifetime rate - always 1/2 death rate applied to LCTs).

Question 10

What is the ‘residence nil rate band’ (RNRB)?

Answer 10

An additional rate band (currently £175,000) for individuals who die on or after 6 April 2017, if they leave their family home to lineal descendants.

Question 11

Can an individual’s surviving spouse/civil partner inherit the unused portion of their basic NRB/RNRB?

Answer 11

Yes.

Question 12

How to work out a person’s cumulative total?

Answer 12

Cumulative total = the total chargeable value of all the chargeable transfers made in the previous seven years.

Question 13

What is the effect of the cumulative total?

Answer 13

To reduce the NRB available for the current transfer
- you must calculate the value of the cumulative total before you can work out the NRB available.

Question 14

What is the purpose of cumulative?

Answer 14

Cumulative is used to prevent individuals reducing their IHT liability by making a series of separate dispositions - instead of viewing each IHT chargeable transfer (failed PET, LCT, death) in isolation, HMRC also consider any other IHT transfers made in the seven years prior to the current transfer being taxed.

Question 15

What is the available NRB to use for a transfer?

Answer 15

£325,000 less the cumulative total.

Question 16

Are gifts to certain individuals or other entities exempt from IHT?

Answer 16

Yes - they can be made completely free from IHT & don’t use up the NRB.

Question 17

Do gifts of particular assets benefit from reliefs?

Answer 17

Yes - where the conditions of the relief are met, the amount of IHT payable is reduced (sometimes by 100%).

Question 18

Do exemptions & reliefs apply to all (PETs, LCTs & death estate)?

Answer 18

No - some only apply to PETs/LCTs, others only apply to death estate. Some apply to both.

Question 19

Which exemptions & reliefs apply to lifetime transfers (failed PETs & LCTs) and the death estate, and should be considered for all chargeable transfers?

Answer 19

1) Spouse exemption - political party exemption

2) Charity exemption - exemptions for gifts for national purposes or to heritage maintenance funds

3) Business property relief - exemption for gifts to EBTs

4) Agricultural property relief - exemptions for gifts to housing associations

Question 20

What does the exemption of business property relief apply to?

Answer 20

Applies to the value of qualifying business assets.

Question 21

In which situations is the exemption of business property relief available to?

Answer 21

Lifetime transfers & the death estate.

Question 22

What does business property include?

Answer 22

• A business or interest in a business (eg business of a sole trader or partnership)
• Shares in an unquoted company
• Shares in a quoted company
• Land or buildings, machinery or plant owned by transferor but used for business purposes by either a company of which the transferor has control, or a partnership of which the transferor was a partner

Question 23

How long must the transferor have owned the business assets for?

Answer 23

At least two years immediately prior to the transfer

(note: BPR isn’t available if the business consists wholly or mainly for making or holding investments)

Question 24

How much rate of relief is available in respect of transfers of a business or interest in a business or shares in an unquoted company?

Answer 24

100% relief applies to all private company shares irrespective of the size of the shareholding.

Question 25

How much rate of relief is available to shares in a quoted company if the shareholder has control of the company?

Answer 25

50% but ONLY IF the shareholder had control of the company (unlikely but possible).

Question 26

Calculating IHT due on a failed PET/LCT - step one

Answer 26

Calculate cumulative total.

Question 27

Calculating IHT due on a failed PET/LCT - step two

Answer 27

Identify value transferred.

Question 28

Calculating IHT due on a failed PET/LCT - step three

Answer 28

Apply exemptions & reliefs.

Question 29

Calculating IHT due on a failed PET/LCT - step four

Answer 29

Apply NRB & calculate tax.

Question 30

Calculating IHT due on a failed PET/LCT - step five

Answer 30

Apply taper relief
(only applies when IHT is being calculated after death)

Question 31

Calculating IHT due on a failed PET/LCT - step six

Answer 31

Give credit for tax paid in lifetime
(only applies when IHT is being calculated after death)

Question 32

Calculating IHT on death estate - step one

Answer 32

Calculate cumulative total.

Question 33

Calculating IHT on death estate - step two

Answer 33

Identify assets included in the taxable estate.

Question 34

Calculating IHT on death estate - step three

Answer 34

Value the taxable estate.

Question 35

Calculating IHT on death estate - step four

Answer 35

Deduct debts/expenses.

Question 36

Calculating IHT on death estate - step five

Answer 36

Apply exemptions & reliefs
(BPR fits into IHT calculation here)

Question 37

Calculating IHT on death estate - step six

Answer 37

Apply RNRB.

Question 38

Calculating IHT on death estate - step seven

Answer 38

Apply basic NRB and calculate tax.

Question 39

When doing a calculation, should your round up or down to the nearest pound at each stage of the calculation?

Answer 39

Round down each individual figure to nearest pound at each stage of calculation.