TAX Planning Flashcards
(134 cards)
1
Q
A
2
Q
What is tax avoidance?
A
Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended.
Often involves convoluted arrangements to hide true nature and affect tax treatment.
3
Q
What is the Ramsay Principle?
A
A method of statutory construction where courts apply tax rules based on the underlying substance of a transaction rather than its form.
Similar to the mischief rule of statutory interpretation.
4
Q
What are the distinctions between tax avoidance, aggressive tax avoidance, and tax evasion?
A
- Tax avoidance: Efficient and lawful arrangement to minimize tax liability.
- Aggressive tax avoidance: Complex arrangements reducing tax liability without reflecting legislative intent.
- Tax evasion: Withholding information or taking steps to avoid paying due taxes unlawfully.
5
Q
Name the anti-avoidance rules relevant to inheritance tax (IHT).
A
- Restriction on deduction of loans for IHT purposes.
- Gifts with reservation of benefit (GROB) rules.
- Pre-owned assets charge (POAC).
- General anti-abuse rule (GAAR).
- Disclosure of Tax Avoidance Schemes (DOTAs).
6
Q
What is the restriction on deduction of loans for IHT purposes?
A
Deductions for loans may be restricted in specific circumstances, such as loans made for acquiring excluded property or loans not repaid from the estate.
7
Q
How does the treatment of loans differ when they are made for BPR assets versus home improvements?
A
Loans for BPR assets must be set against the value of the qualifying assets, reducing relief, while loans for home improvements are not restricted to specific assets.
8
Q
What is a ‘Gifts with Reservation of Benefit’ (GROB)?
A
GROB rules treat property given away but still benefiting the donor as part of the donor’s estate for tax purposes.
9
Q
What conditions must be met for a gift to be classified as a GROB?
A
- The donee does not assume bona fide possession of the property.
- The property is not enjoyed entirely by the donee during the relevant period.
10
Q
What is the ‘relevant period’ for GROB rules?
A
The seven-year period before the donor’s death, or a shorter period if the gift is made less than seven years before death.
11
Q
What constitutes ‘bona fide possession’ under GROB rules?
A
- Obtaining a vested, beneficial interest in the property.
- Actual enjoyment of the property.
- Assuming possession and enjoyment at the start of the relevant period.
12
Q
What happens if a GROB subsists at the date of the donor’s death?
A
The property is treated as part of the donor’s estate for IHT purposes and is valued at the date of death.
13
Q
What are the capital gains tax (CGT) consequences of a GROB?
A
The property becomes the donee’s property for CGT purposes, and CGT may be payable on the increase in value since acquisition.
14
Q
What is the Pre-Owned Assets Charge (POAC)?
A
An annual income tax charge on individuals who give away property but subsequently obtain a benefit from that property.
15
Q
True or False: Tax evasion is a lawful method of minimizing tax liability.
A
False.
16
Q
Fill in the blank: Aggressive tax avoidance often involves exploiting _______.
A
loopholes.
17
Q
What is the potential outcome if a GROB is treated as a failed PET?
A
It could be charged to tax twice if made within 7 years prior to death, but relief is available to prevent double taxation.
18
Q
What is the pre-owned assets charge (POAC)?
A
An annual income tax charge imposed on individuals who give away certain types of property but subsequently obtain a benefit from that property.
Introduced in the Finance Act 2004 to prevent exploitation of GROB rules.
19
Q
What are the three types of property to which the POAC applies?
A
- Land
- Chattels
- Intangible property held in a settlor-interested trust
20
Q
What are the two conditions for land to be subject to POAC?
A
- An individual occupies the land
- Either the ‘disposal condition’ or ‘contribution condition’ is met
21
Q
How is income tax calculated if the POAC applies to land?
A
Based on the market rent the individual would have to pay to occupy the land.
22
Q
What condition must be met for chattels under the POAC?
A
The individual must be in possession of or have the use of the property.
23
Q
How is income tax calculated if the POAC applies to a chattel?
A
By taking the market value of the chattel and multiplying it by an official rate of interest.
24
Q
What are the two conditions for settlor-interested trusts under the POAC?
A
- The trust must be settlor-interested
- The trust property must include intangible property settled by the individual
25
What transactions are excluded from the POAC?
* Transfers to spouse or civil partner
* Dispositions for family maintenance
* Annual and small gift exemptions
* Arm's length sales
* Occupation seven years after cash gift
26
What is the general anti-abuse rule (GAAR)?
A rule enacted to counteract aggressive tax avoidance by penalizing arrangements that exploit loopholes or are contrary to tax law spirit.
27
What conditions must be satisfied for the GAAR to apply?
* There is an arrangement that gives rise to a tax advantage
* The tax advantage relates to a tax to which GAAR applies
* The arrangement satisfies the 'main purpose' test
* The arrangement is abusive
28
What does DOTAS stand for?
Disclosure of Tax Avoidance Scheme.
29
What is the purpose of DOTAS?
To make HMRC aware of potentially unacceptable tax avoidance arrangements at an early stage.
30
What are the conditions for arrangements to be notifiable under DOTAS?
* Arrangements fall within descriptions prescribed by HM Treasury
* Arrangements enable obtaining a tax advantage
* Arrangements involve contrived or abnormal steps
31
What is the IHT hallmark under DOTAS?
Conditions for IHT hallmark include obtaining specific advantages in respect of IHT and involving contrived or abnormal steps.
32
What is the difference between tax avoidance and aggressive tax avoidance?
Tax avoidance is lawful arrangement of affairs to minimize tax liability; aggressive tax avoidance involves complex arrangements that do not reflect the law's intent.
33
What does IHT planning aim to achieve?
* Minimize IHT liability
* Retain sufficient assets for financial security
* Provide adequately for family after death
34
What must solicitors ensure when advising on tax matters?
They must be competent and fully advise clients on implications of tax planning measures.
35
What are the potential consequences of actions taken to reduce IHT?
* Charge to capital gains tax (CGT)
* Reduction in future income
* Anti-avoidance legislation may prevent effectiveness
36
What is a potential consequence of transferring property while living in it rent-free?
The transfer could be a PET for IHT purposes but may trigger CGT liability.
37
What is a PET in the context of IHT?
PET stands for Potentially Exempt Transfer.
## Footnote
A PET can fail if the donor dies within 7 years of making the transfer.
38
What happens if X lives rent free in a property given away as a gift?
It results in a Gift with Reservation of Benefit (GROB), meaning no IHT saving is achieved.
## Footnote
The property is treated as part of X's estate at death.
39
What is the CGT implication for X after transferring property to N?
The increase in value of the property is chargeable to CGT in N’s hands.
## Footnote
X loses the CGT benefit as he is not the legal owner at death.
40
What are the two main categories for lifetime IHT planning?
Exemptions and reliefs, and assets not subject to IHT.
## Footnote
These categories help reduce IHT liability during a person's lifetime.
41
What is the Annual Exemption (s 19 IHTA)?
Allows individuals to make gifts of up to £3,000 each tax year free from IHT.
## Footnote
Unused amounts from the previous year can also be claimed.
42
What is the Family Maintenance Exemption (s 11 IHTA)?
Applies to transfers for education or maintaining dependent family members with no upper limit.
## Footnote
It is often overlooked but can be crucial for clients with high costs.
43
What is the limit for small gifts under the Small Gifts Exemption (s 20 IHTA)?
Up to £250 per recipient can be made free from tax.
## Footnote
This exemption cannot be used in conjunction with the Annual Exemption.
44
What amounts can be given tax free as a wedding gift under the Marriage Exemption (s 22 IHTA)?
£5,000, £2,500, or £1,000 depending on the relationship with the donee.
## Footnote
This exemption can be used alongside the Annual Exemption.
45
What is the Normal Expenditure Out of Income Exemption (s 21 IHTA)?
Regular payments of spare income that do not affect the donor’s standard of living are exempt.
## Footnote
There is no upper limit for this exemption.
46
What is the Spouse Exemption (s 18 IHTA)?
All transfers between spouses/civil partners are fully exempt with no limit if the donor is UK domiciled.
## Footnote
This allows for effective tax planning between spouses.
47
What is the Charity Exemption (s 23 IHTA)?
All transfers to charity are fully exempt with no limit.
## Footnote
Leaving 10% or more of the net estate to charity can reduce the IHT rate.
48
What is the Business & Agricultural Property Relief (s 103-124 IHTA)?
Transfers of qualifying business/agricultural assets are exempt up to either 100% or 50% provided the transferor has owned the assets for the minimum qualifying period.
## Footnote
This relief encourages the transfer of business assets without IHT penalties.
49
What do BPR and APR stand for?
BPR stands for Business Property Relief and APR stands for Agricultural Property Relief
## Footnote
These reliefs help reduce inheritance tax liabilities on qualifying properties.
50
What is a potential investment option for clients regarding BPR/APR?
Clients could invest in a farming partnership or purchase AIM shares
## Footnote
AIM shares are considered 'unquoted' for BPR purposes.
51
What should clients do to ensure they do not compromise their BPR/APR eligibility?
Clients should be advised not to make changes to qualifying assets prior to death
## Footnote
This includes avoiding the sale of such assets.
52
What assets are excluded from the taxable estate for IHT?
Discretionary pension lump sum payments and life insurance policies written in trust
## Footnote
These assets do not count towards the estate's value for inheritance tax.
53
What is the benefit of writing life insurance in trust?
It ensures that the lump sum paid out is not taxed
## Footnote
Writing in trust can help preserve the benefit for beneficiaries.
54
What is a PET?
PET stands for Potentially Exempt Transfer
## Footnote
A PET is a gift that can become exempt from IHT if the donor survives for 7 years after the gift.
55
What happens if a client dies within 7 years of making a PET?
IHT will be charged on the value of the PET at the time it was made
## Footnote
The value is not adjusted to the date of death.
56
What is the parental settlement rule?
Income arising from property given away to a minor child is taxed as if it still belongs to the parent
## Footnote
This applies if the income exceeds £100.
57
What is an LCT?
LCT stands for Chargeable Lifetime Transfer
## Footnote
LCTs are immediately chargeable to IHT depending on the nil rate band available.
58
What is the nil rate band (NRB)?
The NRB is the threshold below which no IHT is payable
## Footnote
It is currently set at £325,000.
59
What are exempt beneficiaries for IHT purposes?
Spouse/civil partner and charities
## Footnote
These beneficiaries do not incur IHT on inherited assets.
60
What is the tax benefit of leaving assets to a spouse?
All gifts to a spouse are exempt from IHT, providing 100% relief
## Footnote
This applies to both specific gifts and the gift of residue.
61
How does charitable gifting affect IHT?
Gifts to qualifying charities are exempt from IHT and can reduce the overall tax rate on the estate
## Footnote
If 10% or more is left to charity, the rate can drop to 36%.
62
What is the minimum ownership period for qualifying business property to benefit from BPR?
Qualifying business property must have been owned for a minimum of 2 years prior to death
## Footnote
This ensures the property qualifies for relief.
63
What is the maximum IHT relief percentage for agricultural property under APR?
The relief can be either 100% or 50% of the agricultural value of the assets
## Footnote
This depends on the specific circumstances of the property.
64
What is a potential risk when making specific gifts of qualifying assets?
BPR and APR may be wasted if specific gifts are made to exempt beneficiaries
## Footnote
This can limit tax-free gifts to non-exempt beneficiaries.
65
What should clients be advised regarding life insurance policies and IHT?
Clients should consider taking out fixed term life assurance to cover IHT on PETs
## Footnote
This helps mitigate the risk of dying within 7 years.
66
What is the advantage of using trusts in tax planning?
Trusts can help benefit a group of people rather than a single individual
## Footnote
This is useful for clients who want to distribute assets among family members.
67
What can trigger a charge to IHT when making a gift into a trust?
The gift is immediately chargeable to IHT
## Footnote
Whether any IHT is payable will depend on the available nil rate band.
68
What does BPR stand for?
Business Property Relief
## Footnote
BPR can provide either 100% or 50% relief on the value of qualifying business assets.
69
What does APR stand for?
Agricultural Property Relief
## Footnote
APR can provide either 100% or 50% relief on the agricultural value of qualifying assets.
70
Under which section of the IHTA does BPR/APR attach to qualifying assets given away specifically?
s 39A IHTA
## Footnote
This section outlines the conditions under which reliefs apply to specific gifts.
71
What happens to BPR/APR if qualifying assets are included in the residuary estate?
They do not attach to the assets
## Footnote
The reliefs are apportioned generally between taxable and non-taxable beneficiaries.
72
What is the effect of apportionment on BPR/APR?
BPR/APR are wasted if allocated to an exempt beneficiary
## Footnote
This occurs when qualifying assets pass to exempt beneficiaries, such as a spouse.
73
What is the inheritance tax exemption for gifts to a spouse or charity?
All gifts are exempt from IHT
## Footnote
This makes it a tax-efficient method of transferring assets.
74
What reduced rate of IHT applies if a testator gives away 10% or more of their estate to charity?
36%
## Footnote
This reduced rate applies to the chargeable part of the estate.
75
What must a client own at the date of their death for BPR/APR to apply?
Qualifying assets
## Footnote
Changes made before death that affect qualification can render the relief inapplicable.
76
What are the two types of exempt beneficiaries for IHT purposes?
* Spouse / civil partner of the deceased
* Charities
77
What is a possible solution for a testator wishing to leave qualifying assets to a spouse?
Make a specific gift to a discretionary trust
## Footnote
This allows the testator to claim BPR or APR while providing for the spouse indirectly.
78
What is the tax implication of a specific gift of qualifying assets to an exempt beneficiary?
BPR/APR are wasted
## Footnote
This occurs because both spouse exemption and BPR apply to the same gift.
79
What is the main risk regarding the ownership of qualifying assets before death?
Selling the assets
## Footnote
Selling may disqualify the assets from reliefs like BPR or APR.
80
What should be considered when drafting a will for tax efficiency?
* Nil rate band
* Exempt assets and beneficiaries
* Trusts
* Allocation of exemptions and reliefs
81
Which type of beneficiary does not incur IHT on their gift?
Exempt beneficiary
## Footnote
This includes spouses and charities.
82
What happens if an exempt beneficiary inherits through a specific gift?
Only the residue is subject to IHT
## Footnote
IHT is paid from the residuary funds.
83
What is the implication of drafting a specific gift as 'free of tax'?
The beneficiary receives the full amount
## Footnote
IHT is paid from other funds, not the specific gift.
84
What is double grossing-up in the context of wills?
It requires complex calculations for gifts and residue allocations
## Footnote
This occurs when specific gifts to chargeable beneficiaries are involved.
85
What does the IHT planning by will aim to achieve?
Minimize the tax liability on a person’s death
## Footnote
This ensures the greatest provision for the surviving family.
86
What type of gifts are exempt from IHT?
Gifts to a spouse or charity
## Footnote
These gifts are considered a tax-efficient method of giving away assets by will.
87
What is double grossing-up required for?
Specific gifts to chargeable beneficiaries and a gift of part of the residue to an exempt beneficiary
## Footnote
It is also required for specific gifts to chargeable beneficiaries where some but not all are 'free of tax'.
88
What should be avoided when drafting a will involving complex IHT calculations?
Drafting a will where double grossing-up is required
## Footnote
These calculations are particularly complex.
89
What do statutory rules determine regarding exempt and non-exempt beneficiaries?
How the benefit of the exemption applies when an estate is divided
## Footnote
IHT is payable in such cases.
90
What is the overall effect of the rules concerning exempt beneficiaries?
Exempt beneficiaries do not suffer the burden of the IHT payable for non-exempt beneficiaries
## Footnote
This ensures fairness in the distribution of the estate.
91
Fill in the blank: The amount of the specific legacy needs to be ______ before the IHT due can be calculated.
grossed-up
92
What happens when IHT is payable due to specific gifts to non-taxable beneficiaries?
The residue passes to an exempt beneficiary
## Footnote
The specific legacy must be grossed-up for accurate IHT calculation.
93
What is the main objective of inheritance tax (IHT) planning by will?
To minimise the tax liability on a person’s death to ensure the greatest provision for their surviving family.
94
What are the key considerations when drafting a will for IHT planning?
* Exempt assets and beneficiaries
* Allocation of exemptions and reliefs
* Nil rate band
* Trusts
95
What does the term 'nil rate band' (NRB) refer to?
The amount that can be passed on without incurring inheritance tax.
96
What does it mean to 'use' the NRB on death?
Making transfers to non-exempt beneficiaries, which are taxed at 0% within the NRB limit.
97
When is the NRB not used at all?
If a client leaves the whole of their estate to an exempt beneficiary.
98
What happens if the total value of gifts to non-exempt beneficiaries is less than the NRB?
The NRB is used in part.
99
How is IHT payable on an estate determined?
IHT is payable only if the NRB is used in full.
100
What options does a married testator have regarding the NRB?
* Leave their whole estate to their spouse (NRB not used)
* Make gifts to non-exempt beneficiaries and give the remainder to their spouse (NRB used in whole or part)
101
What was the rule regarding NRB transfer between married couples prior to 2007?
It was not possible for one spouse to pass on their NRB to the survivor.
102
What happens to the NRB if A leaves everything to B, and B later dies?
A’s NRB is wasted as the whole estate qualified for spouse exemption.
103
What is the tax-efficient solution to avoid wasting the NRB?
A could give a sum equal to the NRB to a non-exempt beneficiary or a discretionary trust.
104
What is the significance of the transferable NRB introduced in 2007?
The survivor can claim their own NRB plus the unused portion of their spouse's NRB.
105
What is the impact of the order of death on unmarried couples regarding NRB?
If the poorer party dies first, their NRB cannot be fully utilized and may be wasted.
106
What is required for a client to claim the residence nil rate band (RNRB)?
* Qualifying residential interest
* Is left absolutely
* To a lineal descendant
107
What factors complicate the use of the RNRB?
* Specific gift of property vs. part of general residue
* Direct passing to lineal descendants
* Age contingencies attached to gifts
108
What is a preferred way to draft gifts of the NRB?
Using a formula clause instead of a fixed sum gift.
109
What is the risk of specifying a fixed sum for the NRB in a will?
Part or all of the gift may become taxable if the full NRB is not available at death.
110
What example illustrates the tax implications for unmarried couples regarding inheritance?
Total IHT paid can be significantly reduced by using a discretionary trust.
111
Fill in the blank: The NRB is reduced or tapered for estates worth over ______.
£2M
112
True or False: The NRB is fixed at the time of the first spouse's death.
False
113
What is a formula clause in the context of inheritance?
A clause that specifies the distribution of the nil rate band (NRB) to a beneficiary, often using terms like 'as much of my nil rate band as is available'
## Footnote
It ensures clarity on the NRB amount and any transfers from a pre-deceased spouse.
114
Why might a testator prefer a clause that maximizes the use of their NRB?
To cover all possible NRB amounts compared to capping the maximum amount for a beneficiary
115
What should a married testator consider regarding their NRB?
Whether to use their NRB if they pre-decease their spouse
116
What happens to the NRB when the first of a married couple dies?
They may leave everything to the survivor, allowing the NRB to be transferred and claimed on the survivor's death
117
What is a key consideration for unmarried couples regarding NRBs?
To ensure both NRBs are fully utilized and to prevent double taxation on inherited assets
118
What must be carefully drafted to utilize the residence nil rate band?
The will must meet qualifying criteria
119
What is the primary objective of inheritance tax planning by will?
To minimize tax liability on death for greater provision for surviving family
120
What are the common considerations when drafting a will for IHT planning?
* Allocation of exemptions and reliefs
* Exempt assets and beneficiaries
* Nil rate band
* Trusts
121
What happens when a testator makes a gift into trust by their will?
The gift takes effect as a transfer to the trustees, who become legal owners of the assets
122
What is a will trust?
A trust created on death by a testator's will
123
What is required in the drafting of a will that creates a trust?
* Set out the terms of the trust
* Appoint trustees
* Identify beneficiaries
* Identify applicable estate parts
* Set scope of trustees' powers
124
What is a discretionary trust?
A trust for a group of beneficiaries with no fixed rights to trust assets, allowing trustees discretion over distributions
125
What is a life interest trust?
A trust for the benefit of a life tenant during their life and a remainderman after the life tenant's death
126
What is the tax implication of a discretionary will trust?
No immediate tax saving compared to making an outright gift; IHT is handled differently
127
What is the relevant property regime?
Tax charges applied to discretionary trusts instead of individual beneficiaries
128
What is a two-year discretionary will trust?
A trust intended to last two years post-death, allowing trustees to distribute assets without immediate tax implications
129
What tax advantage does a life interest trust provide?
Spouse exemption can be claimed if the spouse is the life tenant
130
What are practical advantages of a life interest trust?
* Control over ultimate destination of estate
* Preservation of capital for other beneficiaries
131
What should be considered regarding the needs of a life tenant?
The life tenant's needs should equal their resources plus trust income
132
What happens if a life tenant's needs exceed their resources plus trust income?
Consider making the trust fund larger or giving trustees express powers to advance capital
133
What is the significance of S144 IHTA regarding discretionary trusts?
Distributions made within two years of death are treated as made under the testator's will for IHT purposes
134
What is a key difference between a life interest trust and an outright gift?
A life interest trust allows the testator to control the distribution of their estate after their death
