Topic 10 - Tax Planning Flashcards
(120 cards)
1
Q
What is tax avoidance?
A
Involves bending the rules of the tax system to gain a tax advantage that Parliament never intended
2
Q
What is the Ramsay Principle?
A
A purposive interpretation of legislation where the courts look at the purpose behind the law and apply tax rules based on the underlying substance of the transaction rather than its form
3
Q
What are aggressive tax avoidance schemes?
A
Complex or artificial arrangements that reduce tax liability but do not reflect the intention behind the law
4
Q
Define tax evasion.
A
Withholding information about assets or income to avoid paying the tax that is owed, which is unlawful
5
Q
List the anti-avoidance rules relevant to inheritance tax.
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
Loans made to acquire, maintain or enhance assets that qualify for BPR cannot be deducted from the value of the estate
7
Q
What is a GROB?
A
A gift with reservation of benefit where the donor retains a benefit in the gifted property
8
Q
When do GROB rules apply?
A
- The donee does not assume bona fide possession of the property
- The property is not enjoyed to the entire exclusion of the donor during the relevant period
9
Q
What constitutes bona fide possession under GROB rules?
A
- Obtaining a vested, beneficial interest in the property
- Having actual enjoyment of the property
- Assuming possession and enjoyment at the start of the relevant period
10
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 inheritance tax purposes and valued at the date of death
11
Q
What is the pre-owned assets charge (POAC)?
A
An annual income tax charge on individuals who give away certain property but subsequently obtain a benefit from it
12
Q
What are the consequences of a GROB for capital gains tax (CGT)?
A
The property becomes the donee’s property for CGT, meaning CGT may be payable by the donor on the increase in value since acquisition
13
Q
True or False: Tax avoidance is illegal.
A
False
14
Q
What is the difference between tax avoidance and tax evasion?
A
- Tax avoidance: lawful arrangement to minimize tax liability
- Tax evasion: unlawful withholding of information to avoid tax
15
Q
What are the implications of unpaid loans for IHT calculations?
A
Unpaid loans can only be deducted if they are actually repaid from the estate
16
Q
What is the effect of a GROB if the benefit ceases before the donor’s death?
A
The donor is treated as having made a failed PET on the date the reservation ceased
17
Q
What does the term ‘failed PET’ mean?
A
A gift that is subject to inheritance tax because the donor dies within seven years of making the gift
18
Q
List the conditions under which loans can be deducted from the value of an estate.
A
- Loans made to acquire, maintain, or enhance assets qualifying for BPR
- Loans that are repaid from the estate
19
Q
What is the purpose of anti-avoidance legislation?
A
To prevent aggressive tax avoidance schemes and ensure compliance with tax laws
20
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.
The POAC was introduced to prevent exploitation of GROB rules, allowing individuals to remove property value from estates for IHT while living rent-free.
21
Q
When was the pre-owned assets charge (POAC) introduced?
A
In the Finance Act 2004.
It is sometimes referred to as the pre-owned assets tax (POAT), although this is not strictly accurate.
22
Q
What property types are subject to the POAC?
A
The POAC applies to:
* Land
* Chattels
* Intangible property held in a settlor-interested trust.
23
Q
What are the two conditions that must be satisfied for land to be subject to the POAC?
A
- An individual occupies land
- Either the ‘disposal condition’ or ‘contribution condition’ is met.
24
Q
How is income tax calculated under the POAC for land?
A
It is treated as income based on the equivalent of the market rent the individual would have had to pay to occupy the land.
25
What condition must be met for chattels to be subject to the POAC?
The individual must be in possession of or have the use of the property.
26
How is income tax calculated under the POAC for chattels?
By taking the market value of the chattel and multiplying it by an official rate of interest.
27
What is the general anti-abuse rule (GAAR)?
A rule enacted to counteract aggressive tax avoidance across a range of taxes, including IHT.
28
What are the main conditions for the GAAR to apply?
1. There is an arrangement giving rise to a tax advantage
2. The tax advantage relates to a tax to which the GAAR applies
3. The arrangement satisfies the 'main purpose' test
4. The arrangement is abusive.
29
What does the Disclosure of Tax Avoidance Scheme (DOTAS) do?
It is a reporting regime to inform HMRC about potentially unacceptable tax avoidance arrangements.
30
What are the penalties for failing to comply with DOTAS?
Penalties apply for failure to comply, but non-compliance is not a criminal offence.
31
What are the conditions for arrangements to be notifiable under DOTAS?
1. Arrangements fall within any description prescribed by HM Treasury
2. Arrangements enable obtaining a tax advantage
3. Main benefit is obtaining the identified advantage.
32
What is the main purpose of IHT planning?
To reduce the overall IHT liability on a person's estate.
33
Define tax avoidance.
The efficient and lawful arrangement of a client's affairs to minimize their liability to tax.
34
What is aggressive tax avoidance?
A form of tax avoidance involving complex or artificial arrangements that reduce tax liability without reflecting the intention behind the law.
35
What is tax evasion?
Withholding information about assets or income to avoid paying owed taxes, which is unlawful.
36
What are the three common goals of clients in IHT planning?
1. Minimize IHT by reducing taxable estate
2. Retain sufficient assets for financial security
3. Provide adequately for family after death.
37
What is a gift with reservation of benefit (GROB)?
When an individual gives away an asset but continues to benefit from it, negating IHT savings.
38
What are the implications of taking steps to reduce IHT?
May result in a charge to capital gains tax (CGT) and/or a reduction in future income.
39
What are the two types of transfers of value during a person's lifetime?
PET (Potentially Exempt Transfer) and LCT (Chargeable Lifetime Transfer).
40
What is the effect of a failed PET or LCT?
Can give rise to an IHT charge in its own right.
41
What is the annual exemption amount for gifts free from IHT?
Up to £3,000 each tax year.
42
Which exemption applies to regular payments for education or maintenance of dependent family members?
Family maintenance exemption.
43
What is the maximum amount that can be given as small gifts free from tax?
Up to £250 per recipient.
44
What are the tax-free wedding gift amounts based on relationship?
£5,000, £2,500, or £1,000.
45
What is the normal expenditure out of income exemption?
Regular payments of spare income that do not affect the donor’s standard of living.
46
What is the spouse exemption's key benefit?
All transfers between spouses/civil partners are fully exempt from IHT.
47
What is the charity exemption regarding IHT?
Gifts to qualifying charities are exempt from IHT.
48
What is the impact of leaving 10% or more of an estate to charity on the IHT rate?
The chargeable part of the estate is taxed at 36% instead of 40%.
49
What are exempt beneficiaries for IHT purposes?
Spouse/civil partner and charities.
50
What happens to the spouse exemption if the client is no longer married at the date of death?
The benefit of spouse exemption is lost.
51
What is the significance of making a specific gift of qualifying assets to an exempt beneficiary?
BPR (Business Property Relief) may be wasted.
52
What should clients keep to claim normal expenditure out of income exemption?
A log of all payments made.
53
Fill in the blank: The annual exemption allows individuals to make gifts of up to ______ each tax year free from IHT.
£3,000
54
True or False: The family maintenance exemption has an upper limit on the amount that can be given away.
False
55
What is one reason clients may not want to take advantage of spouse exemption?
One person may control financial affairs and not trust the other.
56
What is the benefit of transferring assets between spouses for CGT purposes?
It is treated as a “no gain and no loss” transfer.
57
What exemption applies to gifts made for education or maintenance of dependent family members?
Family maintenance exemption.
58
What are the two main categories of IHT planning by will?
Exempt beneficiaries and qualifying assets.
59
What is the inheritance tax ('IHT') planning objective when drafting a will?
To minimize the tax liability on a person’s death.
60
What is a potential solution for a testator wanting to make a specific gift of qualifying assets?
Make a specific gift to a discretionary trust.
61
What is the consequence of making a PET if the donor dies within 7 years?
The gift would use up part of the nil rate band.
62
What is the effect of a charity exemption on the IHT rate if a charitable gift is made?
It can reduce the IHT rate on the chargeable part of the estate.
63
What is a key consideration when advising clients about charitable gifts in their will?
Ensure the charity meets the qualifying criteria.
64
What should be advised against in relation to gifts of qualifying assets to exempt beneficiaries?
Making specific gifts of qualifying assets to exempt beneficiaries
## Footnote
This is due to potential tax inefficiency.
65
What are some practical reasons a testator may want their spouse to inherit qualifying assets?
* No appropriate chargeable beneficiary
* Spouse requires assets for their own benefit or to run a business
66
What is a possible solution for a testator to manage qualifying assets?
Make a specific gift of the qualifying assets to a discretionary trust and claim BPR or APR.
67
How can a testator's spouse benefit from trust assets?
If named as one of the trust beneficiaries, they can benefit despite not inheriting directly.
68
What happens to the value of trust assets in relation to the taxable estate of the survivor?
They remain outside the taxable estate of the survivor.
69
What happens if qualifying assets fall into the residuary estate?
APR/BPR do not attach to the assets.
70
What is the effect of apportionment on IHT relief?
It produces different results depending on whether an exempt beneficiary inherits by way of specific gift, gift of residue, or both.
71
What occurs when part of the residuary estate passes to an exempt beneficiary?
APR/BPR are wasted where apportionment allocates some/all of the relief to an exempt beneficiary.
72
What is the basic objective of inheritance tax (IHT) planning by will?
To minimize the tax liability on a person’s death to ensure the greatest provision for surviving family.
73
What factors are usually considered when drafting a will for IHT planning?
* Nil rate band
* Exempt assets and beneficiaries
* Trusts
* Allocation of exemptions and reliefs
74
What are the two kinds of beneficiaries exempt for IHT purposes?
* Spouse / civil partner of the deceased
* Charities
75
What is a key principle regarding gifts to exempt beneficiaries?
All gifts to exempt beneficiaries are made free of IHT.
76
What factors influence the allocation of IHT exemptions?
Statutory rules and express wording within the will.
77
What happens when a specific gift is made to an exempt beneficiary?
Only the residue is subject to IHT.
78
Fill in the blank: The only part of the estate subject to IHT is the specific gift, which is _______.
Subject to tax
79
What does 'grossing-up' mean in relation to tax-free gifts?
Calculating the true value of a gift to determine the amount of IHT due.
80
What is a potential issue with drafting all gifts as 'tax-free'?
More IHT may be payable than if the testator had not made a tax-free gift.
81
What is double grossing-up?
Required calculations for specific gifts to chargeable beneficiaries and part of the residue to an exempt beneficiary.
82
What is the nil rate band (NRB) in IHT planning?
An amount that can be passed on tax-free to non-exempt beneficiaries.
83
What happens if a client leaves their whole estate to an exempt beneficiary?
The NRB is not used at all.
84
How is the NRB utilized when making gifts to non-exempt beneficiaries?
IHT is only payable on an estate where the NRB is used in full.
85
What was the change introduced in 2007 regarding the NRB for married couples?
Unused NRB can now be transferred to the survivor.
86
What is the effect of the survivor's estate including assets inherited from the first to die?
The survivor's estate can utilize both their own NRB and the unused NRB of the deceased spouse.
87
What are some reasons a client may choose to use or not use their NRB?
* Intention to benefit someone other than a spouse
* Desire to keep the survivor’s estate smaller
* Anticipation of future changes in NRB
88
What is the implication of a fixed NRB at the first death?
The amount of the NRB is not fixed until the death of the survivor.
89
What happens if the NRB increases between the first and second death?
It may be better for the first spouse not to use their NRB.
90
Is the spouse exemption available for unmarried couples?
No, the spouse exemption is not available for unmarried couples.
91
What tax is payable on the first and second deaths for unmarried couples?
Tax will be payable on the first and second deaths unless other exemptions apply.
92
What happens if the poorer party of an unmarried couple dies first?
Their NRB cannot be used in full, and the unused part is wasted.
93
What are the criteria for claiming the residence NRB (RNRB)?
* Qualifying residential interest
* Left absolutely
* To a lineal descendant
94
What is the effect of tapering on the NRB for estates worth more than £2M?
The NRB is reduced (tapered) for estates worth more than £2M.
95
What is a common preferred clause when drafting gifts of the NRB?
A formula clause is usually preferred.
96
What is the simple objective of IHT planning by will?
To minimise the tax liability on a person’s death.
97
What does a trust created on death by a testator’s will refer to?
A will trust.
98
What is the legal status of a trust?
A trust does not have separate legal personality.
99
What are the four main types of will trust likely to be seen?
* Discretionary Trust
* Life Interest Trust
* Trusts for young people
* Trusts for disabled people
100
What is the tax implication of a discretionary will trust for the testator’s estate?
There is no immediate tax saving for the testator.
101
What happens to trust assets when a beneficiary dies?
Their taxable estate does not include the trust assets.
102
What is the relevant property regime in relation to trusts?
IHT charges applied to the trust instead of individual beneficiaries.
103
What are two reasons a settlor may wish to set up a discretionary trust?
* Flexibility
* Protection
104
What is the limit of two years in relation to discretionary will trusts?
Distributions of capital from a discretionary trust made by the trustees within two years of the testator’s death are deemed to have taken place under the IHTA.
105
What are tax charges applied to discretionary trusts commonly referred to as?
The ‘relevant property regime’
106
What is outside the scope of the current module?
Trust taxation and the relevant property regime
107
What is the duration of a 2 Year discretionary will trust?
Two years following a testator’s death
108
Under which act are distributions of capital from a discretionary trust deemed to take place under the deceased’s will for IHT purposes?
s 144 Inheritance Tax Act 1984 (‘IHTA’)
109
What do trustees decide in a two-year discretionary will trust?
Who among the trust beneficiaries should inherit and what they should receive
110
What is a key characteristic of a two-year discretionary will trust?
Allows the testator flexibility in estate distribution
111
Fill in the blank: A testator often appoints their __________ as one of the trustees.
Surviving spouse
112
What happens to the estate value after payments are made by the trustees?
Value of the estate is less than the NRB
113
What can be claimed after the IHT exemption is applied in the example?
A refund of all of the IHT paid following death
114
What must be the condition for claiming spouse exemption on a life interest trust?
The testator’s spouse is the life tenant
115
Fill in the blank: There is no spouse relief if the testator's spouse is a __________ beneficiary.
Remainder
116
What is one tax advantage of a life interest trust compared to a gift to a non-exempt beneficiary?
Spouse exemption applies
117
What is a key practical advantage of a life interest trust?
Control over the ultimate destination of the estate
118
Why might a testator create a life interest trust if they have remarried?
To preserve assets for children from a previous marriage
119
What is the ideal equation for a life tenant's needs?
Life tenant's needs = life tenant's resources + trust income
120
What should a testator consider if a life tenant's needs exceed their resources plus trust income?
Make the trust fund larger or ensure trustees have powers to advance capital
