Topic 9 - IHT Flashcards
(94 cards)
1
Q
What is inheritance tax (IHT)?
A
A tax primarily paid on the estate of a deceased person, applicable to UK assets of UK resident taxpayers and worldwide assets of UK-domiciled taxpayers.
2
Q
What are the rates of inheritance tax?
A
- Nil rate band: 0%
- Lifetime rate: 20%
- Death rate: 40%
3
Q
What is the Inheritance Tax Act 1984 (IHTA)?
A
Legislation that outlines the scope of inheritance tax to prevent avoidance by reducing estate value during a person’s lifetime.
4
Q
What are the three kinds of IHT trigger events?
A
- Potentially exempt transfers (PET)
- Lifetime chargeable transfers (LCT)
- Death
5
Q
Define Potentially Exempt Transfer (PET).
A
A lifetime transfer of value that could become chargeable to IHT if the transferor does not survive for seven years post-transfer.
6
Q
What happens if a transferor dies within seven years of making a PET?
A
The PET fails and becomes a chargeable transfer subject to IHT.
7
Q
Define Lifetime Chargeable Transfer (LCT).
A
A lifetime transfer of value that is immediately chargeable to IHT at the lifetime rate.
8
Q
What is the tax treatment of an LCT if the transferor dies within seven years?
A
The LCT is reassessed to tax at the death rate of 40% using the nil rate band at the date of death.
9
Q
How is the value of a death estate calculated for IHT?
A
By reference to the market value of items in the estate on the date of death.
10
Q
What is the basic nil rate band (NRB) for individuals?
A
£325,000, meaning the first £325,000 of a transfer subject to IHT is taxed at 0%.
11
Q
What is the transferable nil rate band (TNRB)?
A
The unused portion of a deceased individual’s basic NRB that can be inherited by a surviving spouse or civil partner.
12
Q
What is the residence nil rate band (RNRB)?
A
An additional nil rate band of £175,000 for individuals who leave their family home to direct descendants.
13
Q
What is cumulation in relation to IHT?
A
A process to prevent individuals from reducing their IHT liability by making a series of separate dispositions within seven years.
14
Q
What is the formula for calculating IHT on lifetime transfers?
A
- Identify value transferred
- Apply exemptions & reliefs
- Identify chargeable value
- Calculate and apply NRB
- Apply rates of tax
15
Q
What is the step-by-step process for calculating IHT on a death estate?
A
- Calculate cumulative total
- Identify assets in the taxable estate
- Value the taxable estate
- Deduct debts/expenses
- Apply exemptions & reliefs
- Apply RNRB
- Apply basic NRB and calculate tax
16
Q
True or False: The taxable estate and death estate are the same for IHT purposes.
A
False
17
Q
What is a chargeable transfer?
A
A transfer of value made by an individual that is not an exempt transfer.
18
Q
Define ‘transfer of value’.
A
A disposition that results in an immediate decrease in the value of the individual’s estate.
19
Q
What happens to the NRB if a cumulative total is calculated?
A
The NRB available for the current transfer is reduced by the cumulative total.
20
Q
What is the cumulative total?
A
The total chargeable value of all chargeable transfers made in the previous 7 years.
21
Q
What is the tax treatment of gifts to certain individuals?
A
They are exempt from IHT and do not use up the NRB.
22
Q
What is the significance of a failed PET?
A
It refers to a situation where an individual does not survive for seven years after making a PET, making it a chargeable transfer.
23
Q
What is the difference between a donor and a transferor?
A
They may be used interchangeably in the context of transfers.
24
Q
What happens to unused NRB when a married individual dies?
A
The PRs of the surviving spouse can claim an increase in the survivor’s NRB equal to the unused percentage of the first spouse’s NRB - the TNRB.
TNRB stands for transferable nil rate band.
25
How is the TNRB amount calculated?
The TNRB is equal to a % of the NRB sum on the date the survivor dies, not simply the unused amount carried forwards.
## Footnote
This benefits the taxpayer by using the increased NRB threshold at the time of the second death.
26
What is the impact of the NRB amount changing between the first and second death?
If the NRB amount has not changed, the unused amount and unused % will be the same.
## Footnote
The TNRB is based on the NRB at the time of the second spouse's death.
27
Can the TNRB be claimed for chargeable lifetime transfers?
No, the TNRB cannot be claimed in respect of a chargeable lifetime transfer when it is made by the survivor.
## Footnote
The TNRB is only available after the surviving spouse dies.
28
What is the cap on TNRB claims for individuals who have survived multiple spouses?
The cap is 100% of a full nil rate band being transferred.
## Footnote
Individuals can claim TNRB from all deceased spouses, subject to this cap.
29
What must PRs do to claim TNRB?
PRs must make a claim for the TNRB in the IHT return within two years of the end of the month of death.
## Footnote
If this deadline is missed, others liable for IHT can make the claim afterward.
30
What is the Residence Nil Rate Band (RNRB)?
The RNRB provides an additional nil rate band if specific conditions are met, including the deceased dying on or after 6 April 2017 and their death estate including a qualifying residential interest.
## Footnote
It was introduced by the Finance (No 2) Act 2015.
31
What is the full amount of the RNRB?
The amount of a full RNRB is £175,000.
## Footnote
It may be capped at the value of the property if the deceased's share is less than this amount.
32
What is a qualifying residential interest (QRI)?
A QRI is a residential property interest which is part of the deceased’s estate immediately before death.
## Footnote
It includes properties the deceased occupied or intended to occupy.
33
What does 'closely inherited' mean in the context of RNRB?
A beneficiary closely inherits if they receive the QRI by a gift under the will, intestacy, or rules of survivorship.
## Footnote
Specific exceptions apply for contingent interests.
34
Who qualifies as a direct descendant for RNRB purposes?
Direct descendants include the deceased's children, grandchildren, and their spouses, but not siblings or parents.
## Footnote
Adopted, step-children, and foster children are included.
35
What is the significance of the downsizing rules related to RNRB?
The downsizing rules allow an estate to qualify for a full RNRB even if the deceased did not own a QRI at death, provided certain conditions are met.
## Footnote
The downsizing addition is calculated based on the RNRB that would otherwise be lost.
36
How can unused RNRB be transferred to a surviving spouse?
The unused RNRB can be transferred if the survivor leaves a QRI to a direct descendant and the deceased spouse did not use their own RNRB.
## Footnote
The transfer is capped at 100% of the unused RNRB.
37
What is the maximum combined NRB amount for a person's estate?
The maximum combined NRB amount can total £1 million.
## Footnote
This occurs when both spouses' NRBs are utilized in the estate transfer.
38
Fill in the blank: The RNRB amount is reduced by £1 for every £2 above the _______ threshold.
£2 million.
39
True or False: The PRs of a surviving spouse can claim TNRB for previous spouses without separate claims.
False.
40
Define Potentially Exempt Transfer (PET)
A PET is a lifetime transfer of value to another individual that becomes chargeable if the transferor dies within seven years.
41
What happens to a PET if the transferor survives for seven years?
The PET becomes fully exempt from IHT.
42
What is a Lifetime Chargeable Transfer (LCT)?
An LCT is a chargeable transfer made into a trust on or after 22 March 2006.
43
What is the tax rate on an LCT?
IHT is payable at the lifetime rate of 20% on an LCT.
44
What happens if the transferor dies within seven years after making an LCT?
The LCT will be reassessed to tax at the death rate using the NRB at the date of death.
45
List the steps for calculating IHT on lifetime transfers.
* Step A: Calculate cumulative total
* Step B: Identify value transferred
* Step C: Apply exemptions and reliefs
* Step D: Apply basic NRB and calculate tax
* Step E: Apply taper relief
* Step F: Give credit for tax paid in lifetime
46
What is a transfer of value?
A transfer of value is a disposition resulting in an immediate decrease in the value of the individual’s estate.
47
List some exemptions and reliefs applicable when calculating IHT on lifetime transfers.
* Spouse exemption
* Charity exemption
* Family maintenance exemption
* Annual exemption
* Small gifts allowance
* Normal expenditure from income
* Marriage exemption
* Business property relief
* Agricultural property relief
48
What is the basic NRB fixed at since April 2009?
The basic NRB is fixed at £325,000.
49
What is the tax rate on failed PETs and reassessed LCTs?
Tax is payable at the death rate of 40%.
50
What is taper relief?
Taper relief reduces the amount of IHT due if the transferor dies 3-7 years after making a transfer.
51
What is 'grossing up' in the context of IHT?
Grossing up refers to including the amount of IHT paid as part of the value of the gift when calculating the total value transferred.
52
List the steps for calculating IHT on the death estate.
* Step 1: Calculate cumulative total
* Step 2: Identify assets included in the taxable estate
* Step 3: Value the taxable estate
* Step 4: Deduct debts/expenses
* Step 5: Apply exemptions & reliefs
* Step 6: Apply RNRB
* Step 7: Apply basic NRB and calculate tax
53
What is included in the taxable death estate?
All property to which the deceased was beneficially entitled at the date of death.
54
What is the significance of chargeable transfers made in the 7 years prior to death?
They reduce the NRB available for the death estate.
55
What is included in a person's taxable death estate for IHT purposes?
All property to which the deceased was beneficially entitled at the date of death, including property in the UK and abroad if UK-domiciled
## Footnote
Certain items may appear to belong to the deceased but are excluded for IHT purposes.
56
What types of property are included in the taxable estate?
* All jointly owned property
* Property subject to a reservation
* Donationes mortis causa
* Statutory nominations
* Some interests in possession
57
How is jointly owned property treated for IHT purposes?
If owned as tenants in common, the share passes into the estate; if owned as joint tenants, the tax position is considered separately.
58
What happens to jointly owned property at death for tax purposes?
There is a deemed severance of the joint tenancy immediately before death, including the deceased's share in the taxable estate.
59
What is a donationes mortis causa (DMC)?
A lifetime gift made conditional on death, still part of the deceased’s estate for IHT purposes.
60
What is the effect of property subject to a reservation on IHT?
The value of the asset at date of death will be included in the donor’s IHT estate if they reserved a benefit.
61
What are statutory nominations?
Written nominations of monies in accounts with Friendly Society, Industrial Society, or Provident Society, passing to the nominee upon death.
62
How were interests in possession trusts treated for IHT before 22 March 2006?
The capital value was treated as owned by the life tenant for IHT purposes.
63
What happens to interests in possession trusts created after 22 March 2006?
Life interests created post-death are included in the taxable estate; those created during the settlor's lifetime are not included.
64
What is excluded property in the context of IHT?
Property such as a remainder interest in a life interest trust is not included in the remainderman’s taxable estate.
65
What happens to the proceeds of an insurance policy written in trust for another?
The proceeds are not included in the deceased's estate for IHT purposes.
66
How are discretionary pension scheme payments treated for IHT?
They are not included in the taxable estate as the deceased is not deemed to have entitlement.
67
What is the general rule for valuing assets in the estate?
Assets are valued at market value at the date of death.
68
What special rules apply to quoted shares for IHT valuation?
Quoted shares are valued by taking the lower of two prices on the Stock Exchange Daily List and adjusting based on the price difference.
69
What is the treatment for co-owned property valuation?
The value of the deceased's share is reduced by 10-15% to reflect sale difficulties, except when co-owners are married.
70
What debts can be deducted from the taxable estate's value?
* The deceased’s debts due at the date of death
* Reasonable funeral expenses
* Cost of a tombstone
71
What exemptions or reliefs can be deducted from the taxable estate?
* Spouse exemption
* Charity exemption
* Business property relief (BPR)
* Agricultural property relief (APR)
72
What is the residence nil-rate band (RNRB)?
A tax relief available for the value of the residence when calculating IHT.
73
What is the basic nil-rate band (NRB) for IHT?
A threshold for IHT above which tax is charged at 40%.
74
Who is generally liable for paying IHT on a lifetime transfer?
The person in whom the assets vest (the donee) is usually liable.
75
What is the consequence if trustees do not pay the tax on a lifetime transfer?
The donor becomes liable unless they elect to pay it themselves.
76
What happens to failed PETs and LCTs after the donor's death?
The lifetime recipient (donee) is generally liable to pay the IHT due.
77
What is the deadline for paying IHT due on lifetime transfers?
12 months from the end of the month of death.
78
What is the liability of trustees regarding gifts to a trust after death?
Trustees are primarily liable to pay any further IHT due using assets in the trust fund at the time of death.
## Footnote
This is an LCT that will be re-assessed to IHT following death.
79
Who becomes liable for IHT if the recipient of a lifetime transfer does not pay it within the deadline?
The deceased’s personal representatives (PRs) become liable if the recipient does not pay within 12 months from the end of the month of death.
## Footnote
PRs should retain sufficient funds to pay the tax bill.
80
What happens to the burden of IHT when estate funds are used?
The ultimate burden of the tax falls on the residuary beneficiaries.
## Footnote
This occurs when PRs use estate funds to pay the tax.
81
What is the impact of a failed PET on IHT?
IHT is payable in respect of both the failed PET and the death estate.
## Footnote
This is illustrated by the example of a woman who dies 5 years after making a gift.
82
What constitutes a taxable death estate?
Assets that are excluded from the succession estate.
## Footnote
These assets pass to PRs to be administered under the will/intestacy rules.
83
What are examples of taxable assets that pass outside of the succession estate?
* Joint tenant property
* Gifts with reservation of benefit (GROB)
## Footnote
These assets are not subject to the terms of the will or intestacy rules.
84
How is IHT calculated when considering the free estate and other taxable items?
Total IHT due is calculated and apportioned between the free estate and other taxable items.
## Footnote
The free estate is also referred to as the 'free estate' in context.
85
Who is liable to pay IHT on the free estate?
The deceased’s personal representatives (PRs) are liable to pay this tax.
## Footnote
IHT on the free estate is a general testamentary and administration expense.
86
What is the general rule regarding IHT payment from the estate?
IHT is paid from residue unless a contrary intention appears in the will.
## Footnote
This is established under s 211(2) IHTA.
87
What does 'free of tax' imply in the context of gifts in a will?
Gifts in a will are deemed to be given 'free of tax' unless otherwise stated.
## Footnote
This means the tax is payable from residue.
88
What happens if a will states gifts are 'subject to' IHT?
Gifts are paid subject to a deduction of the IHT attributable to them.
## Footnote
This relieves the burden for residuary beneficiaries.
89
What constitutes a contrary intention in a will regarding IHT?
The testator's intention to exonerate or burden parts of their estate is determined by the construction of the terms of the will.
## Footnote
There is no prescribed wording for a contrary intention.
90
What is the consequence of poorly drafted gifts in a will concerning IHT?
There may be no part of the estate that could be used to pay IHT, making the will ineffective.
## Footnote
This occurs if all gifts are made free of tax without sufficient estate value.
91
How does the allocation of exemptions complicate IHT calculations?
If part of an estate qualifies for an exemption, it complicates determining where the burden of IHT falls.
## Footnote
Care must be taken when allocating IHT between different parts of the estate.
92
Who is liable for IHT on joint tenant property?
The surviving co-owner is liable for IHT on joint tenant property.
## Footnote
This is a general rule applicable to joint tenancy.
93
What is the liability for IHT on assets that fall outside of the succession estate?
The beneficiary of the item or the trustees in the case of a trust are liable for the IHT attributable to those items.
## Footnote
This applies to items like statutory nominations and donationes mortis causa.
94
What is the proportion of IHT liability calculated based on?
The proportion owed by each party is calculated with reference to the value of the asset relative to the value of the whole estate.
## Footnote
This can be complicated when not all assets are subject to IHT.
