Taxation Topic 4 - Inheritance Tax

Question 1

What are the 2 main laws relating to IHT

Answer 1

• Finance act 1986
• Inheritance tax Act 1984

Question 2

Who pays IHT

Answer 2

IHT applied to anyone who is UK domiciled, anyone who is not UK domiciled only pays it on UK assets.

Question 3

What is the rules around IHT and contributing to charity, what benefit does this have for your estate

Answer 3

IHT reduced to 36% if at least 10% of the estate is left to charity

Question 4

When is RNRB reduced and by how much

Answer 4

• RNRB is reduced by £1 for every £2 that the estate (in whole) is in excess of £2 million

Question 5

What is the cumulative principle

Answer 5

All gifts/transfers are added together to reach the NRB collectively.

Question 6

What checks are done relating to the cumulative principle

Answer 6

If any transfers fall into the last 7 years of their life, then the 7 years previous to that are checked to see if there was any unused NRB at the time of the more recent transfer, meaning a potential 14-year period must be checked if chargeable transfers have been made. Any CLTs are added to the total value of the estate.

Question 7

What are the exempt transfers

Answer 7

• Transfers between spouses or civil partners
• Small gifts
• Annual exemptions
• Donations to charity
• Wedding and ceremonial gifts
• Gifts made on a regular basis out of income
• Family maintenance
• Death in active service/emergency circumstances

Question 8

What are the rules around divorce and exempt transfers

Answer 8

• If marriage or partnership breaks down, transfers still exempt until decree is absolute

Question 9

What is the maximum amount of a ‘small gift’ and how many times can you make a small gift annually

Answer 9

£250
* This gift can be made as many times as they like within the year as long as it is to different people

Question 10

How much is the annual gift exemption, and for how many years can it be used

Answer 10

• Up to £3,000 each year
• Unused exemption can be carried forward for 1 year only

Question 11

What are the exemptions for gifts for weddings and ceremonial gifts

Answer 11

• £5,000 if the donation is from a parent of a party to the marriage
• £2,500 if the donation is from grandparent or remote ancestor
• £2,500 if the donation is from one spouse to the other before marriage
• £1,000 if the donor is any other person

Question 12

What are the qualifications for exemptions around Gifts that are made on a regular basis out of income

Answer 12

• Transfer must be made out of income, be a part of a regular pattern of expenditure and not affect the donor’s standard of living

Question 13

What are the exemptions surrounding deaths in active service/emergency services

Answer 13

• Estates of people in the army or emergency services are free from IHT if they die of something related to their line of work (wound from army/emergency call out etc.)

Question 14

What is the time span from a gift being made that taper relief is available

Answer 14

• If the donor dies between 3-7 years of the gift being made, taper relief can be applied

Question 15

What trusts were affected in terms of IHT in 2006

Answer 15

• IIP trusts
• Bare trusts
• Disabled trusts
• Accumulation and maintenance (A&M) trusts
• Discretionary trusts

Question 16

How were IIP trusts changed after 2006

Answer 16

Now CLT’s
Subject to regular charge every 10 years and exit charges

Question 17

How were bare trusts changed after 2006

Answer 17

Any gifts or transfers are PETs and the IHT liability falls absolutely on the beneficiary(s)

Question 18

How were disabled trusts changed after 2006

Answer 18

• Not considered a relevant property trust – no 10-year charge
• No exit charges providing the asset stays in trust and is in the best interest of the beneficiary
• Transfers into a disabled trust are PETs

Question 19

What are the main IHT reliefs

Answer 19

• Quick succession relief
• Business relief
• Agricultural relief
• Woodlands relief

Question 20

What is quick succession relief

Answer 20

• For the instance that an inheritor dies, so the next inheritors get a taper relief style credit on the IHT that would have been paid initially when the first inheritors would have acquired the assets.

Question 21

What is business relief and how must you qualify for it

Answer 21

This relief is given to qualifying business assets and is given at 100% or 50%.
* To qualify, the donor must have held the relevant property for at least 2 years.
* Any assets that have not been used in the business in the previous 2 years and any assets not needed for future use in the business must be ignored when valuing business property
* Relief not available for businesses that make/deal wholly or mostly in securities, stocks and shares or land and buildings.

Question 22

What is agricultural relief and how must you qualify for it

Answer 22

• Similar to business relief, available where the transferor had a right to vacant possession of the land, or could obtain it within 24 months at 100%; otherwise at 50%
• Agricultural property is farmland or woodlands plus any farm buildings and appropriate residential property (excludes animals or equipment)
• Land must have been farmed by transferor for previous 2 years or owned for last 7 years if farmed by someone else

Question 23

What is woodlands relief and its requirements

Answer 23

• 100% available after 2 years of ownership and management of woodland as a business
• If woodlands have not been operated as a business, providing the owner had owned for at least 5 years, a form of deferral of IHT is available by election
• This relief excludes and value of timber, property or land. Land may be subject to agricultural relief
• If property has been owned for 5 years, payment of IHT can be deferred until timber has been sold, and any charges included in this can be deducted from the bill

Question 24

What is pre-owned assets tax (POAT)

Answer 24

A charge to income tax on benefits received by a former owner of certain types of property. It is an income tax on certain IHT planning schemes, the property within the scope can broadly come under 3 headings:

• Land
• Chattels
• Intangible property

Question 25

What are the types of benefits linked to a chargeable person subject to POAT

Answer 25

Benefits may include occupation of the land, use of chattels or income or capital from a settlement holding intangible property

Question 26

Under what money amount is no POAT charged

Answer 26

£5,000

Question 27

How often must assets be valued for POAT

Answer 27

Every 5 years

Question 28

Exclusions from the POAT charges on land and chattels include:

Answer 28

• Transfers between spouses or civil partners
• Transfers between former spouses or civil partners where ordered by a court
• Transfers in which spouse or civil partner has an IIP from the outset
• Assets sold at arm’s length for cash

Question 29

Exemptions from the POAT charges arise if that asset

Answer 29

• Was gifted before 1986
• Was transferred for the purposes of maintaining the family in accordance with the ‘maintenance of family’ IHT exemption
• Was an outright gift covered by small gift or annual gift allowance
• Already forms part of the donors estate due to IIP rule

Question 30

What is meant by ‘grossing up’

Answer 30

CLTs have to be grossed up if the tax is being paid by the transferor, because the tax on the transfer will be taken out of the amount of money entering the trust for example. You have to gross up the donation so that the desired amount actually makes it to the trust

Question 31

When are IHT payments due for CLTs

Answer 31

For CLTs made between 6 April and 30 September, any IHT payment is due by 30 April the following year. For transfers made between 1 October and 5 April, IHT due no later than 6 months at the end of the month of the transfer.

Question 32

When are IHT payments due for transfers upon death

Answer 32

For transfers upon death, the IHT is due no later than 6 months at the end of the month of the transfer.

Question 33

What happens if you do not pay IHT on time

Answer 33

Interest is charged