Wills (Tax Planning)

Question 1

The Ramsay Principle - HMRC takes a purposive approach to the relevant anti-avoidance legislation

Answer 1

the courts will look at the purpose behind the legislation and apply the tax rules based on the underlying substance of the transaction rather than its form

Question 2

What are the requirements for a donee to be treated as having bona fide possession of the gifted property for the purposes of the GROB rules?

Answer 2

They must have a:
- vested, beneficial interest in the property
- actual enjoyment of the property
- assume possession and enjoyment at the start of the relevant period.

Question 3

Exclusion of the donor requirement for a GROB

Answer 3

donor must be entirely or virtually excluded from benefitting from the property

Question 4

Why might it be worth to wait to make the gift on death?

Answer 4

the free CGT uplift - there is no CGT liability in relation to gains accrued during the deceased’s lifetime for the donor’s estate, and the donee is treated as acquiring the property for its market value at the date of death

Question 5

The pre-owned assets charge (POAC)

Answer 5

an annual income tax charge imposed upon individuals who give away certain types of property during their lifetime but subsequently obtain a benefit from that property

Question 6

Can a property be taxed under both GROB and POAC?

Answer 6

No - however, it is possible to make an election for property to be taxed as a GROB instead of a POAC

Question 7

What 3 types of property does the pre-owned assets charge (POAC) apply to?

Answer 7

Land, chattels and intangible property held in a settlor-interested trust

Question 8

2 conditions must be satisfied for land to be subject to the POAC

Answer 8

An individual occupies land (“occupation” should be construed widely)
AND
Either the ‘disposal condition’ or ‘contribution condition’ is met

Question 9

If the POAC applies to land, the benefit that the individual receives through their occupation is treated as

Answer 9

income for tax purposes based on the market rent they would otherwise need to pay

Question 10

If the POAC applies to a chattel, how will the income tax be calculated?

Answer 10

by taking the market value of that chattel and multiplying it by an official rate of interest

Question 11

Consequences of trying to circumvent the general anti-abuse tax rule (‘GAAR’)

Answer 11

the taxpayer must counteract the abusive effect of the arrangements by making “just and reasonable” adjustments. A penalty (of 60% of the counteracted amount) is also payable.

Question 12

When does the GAAR apply?

Answer 12

An arrangement gives rise to a tax advantage (incl IHT)
main purpose test - a tax advantage is one of the main purposes of the arrangement
‘double reasonableness test’ → the arrangement is abusive

Question 13

Disclosure of Tax Avoidance Schemes (‘DOTAs’)

Answer 13

a reporting regime which is intended to make HMRC aware of potentially unacceptable tax avoidance arrangements at an early stage

Question 14

Who is under a duty to report under DOTAs?

Answer 14

‘promoters’ of arrangements, including legal advisers, should inform HMRC about notifiable arrangements or proposals

Question 15

2 conditions for the DOTAs IHT hallmark to apply

Answer 15

The main purpose or one of the main purposes of the arrangements is to enable a person to obtain one or more specific advantages in respect of IHT
e.g. avoidance or reduction of specified IHT charges, charges under the GROB rules

The arrangements involve abnormal steps without which there would be no tax advantage.

Question 16

Examples of IHT hallmarks that should be reported to DOTAS

Answer 16

Creation of an employee benefit trust to benefit the settlor’s children after the settlor’s death

Question 17

Beneficiaries who are exempt for IHT purposes

Answer 17

Spouse / civil partner
Charities

Question 18

Why is it beneficial for a testator to leave 10% or more of their net estate to charity?

Answer 18

because the chargeable part of the estate is taxed at 36% (rather than 40%)

Question 19

When will APR and BPR be wasted?

Answer 19

If applied to gifts that are already being given to exempt beneficiaries (eg spouse exemption)

Question 20

Why is advisable to leave specific gifts of qualifying assets for APR/BPR to a discretionary trust rather than a spouse?

Answer 20

a discretionary trust is a non-exempt beneficiary so APR/BPR can apply. if the spouse is named as a beneficiary of the trust, they can benefit from the assets despite not inheriting directly.

Question 21

spouse exemption only offers a tax saving if the client’s estate would otherwise be

Answer 21

taxable

Question 22

The NRB is not used at all if a client leaves the whole of their estate to an

Answer 22

exempt beneficiary

Question 23

When is the NRB used in full?

Answer 23

if the total value of gifts to non-exempt beneficiaries is greater than the NRB

Question 24

If the NRB is not exceeded, is IHT payable?

Answer 24

No, IHT is only payable if the estate exceeds the NRB

Question 25

Can you witness a will in which your spouse/civil partner is a named beneficiary?

Answer 25

No

Question 26

The NRB is reduced (tapered) for estates worth more than

Answer 26

£2M

Question 27

Criteria for claiming the RNRB

Answer 27

qualifying residential interest, left absolutely, to a lineal descendant (children, grandchildren etc)

Question 28

What clause is recommended for drafting clauses of the NRB?

Answer 28

A formula clause is usually preferred: “I give as much of my NRB as is available to my daughter” in case the NRB is not fully available on death

Question 29

Where the testator creates a trust by will, the will is the

Answer 29

trust deed

Question 30

Downside to making a discretionary will trust

Answer 30

there is no immediate tax saving for the testator (or their estate) compared to making an outright gift. No spouse exemption can apply. RNRB does not apply to residential interests in the trust.

Question 31

Does the RNRB apply if the testator's residential interest passes to a discretionary trust?

Answer 31

No, the RNRB does not apply if the deceased’s residential interest passes to a discretionary trust, even if the testator’s children are benefitting because the children are not inheriting ‘directly’.

Question 32

Non-tax reasons for discretionary will trust

Answer 32

flexibility - trustees will decide who gets what protection - not controlled or owned by a single beneficiary; usually protected from creditors and divorce proceedings

Question 33

How is a testamentary trust taxed?

Answer 33

HMRC apply IHT charges to the trust - typically much less than outright gifts

Question 34

Benefit of 2 year discretionary will trusts

Answer 34

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 deceased’s will for IHT purposes and not by the trustees

Question 35

When can spouse exemption apply to a lifetime interest trust?

Answer 35

If the spouse is a life tenant

Question 36

Spouse relief does not apply to a lifetime interest trust if the testator's spouse is a

Answer 36

remainder beneficiary

Question 37

key practical advantage of a life interest trust

Answer 37

the testator can specify who benefits as the life tenant whilst preserving the capital of their estate for other beneficiaries

Question 38

Benefit for a testator of setting up a trust with spouse as life tenant and children as remaindermen

Answer 38

spouse exemption applies, and preserves the assets for the children (particularly important if spouse might remarry)

Question 39

If your client gifts a house but continue to live in it, what should they do to avoid it becoming a GROB?

Answer 39

pay market rent to the donee during their period of occupation

Question 40

A variation

Answer 40

a direction from an original beneficiary to the deceased’s PRs to transfer property that the beneficiary is entitled to under the terms of a will or intestacy rules to another person instead

Question 41

Benefit of making a variation

Answer 41

IHT writing-back effect - gift treated for IHT purposes as being made by the deceased so original beneficiary does not make a PET; IHT due on the deceased’s death estate is re-calculated on the basis the deceased left the property to the new beneficiary

Question 42

Conditions for a valid variation under s.142 IHTA

Answer 42

made by the original beneficiary in writing; within 2 years of the deceased’s death; contains an express statement by the beneficiary confirming s.142 should apply; not be made for consideration in money or money’s worth

Question 43

Does a beneficiary need the PRs approval to vary their entitlement to the estate assets?

Answer 43

No. However, if the variation results in additional IHT being due in respect of the deceased's estate, the PRs should: Sign the variation Provide HMRC with a copy of the written variation and pay the amount due

Question 44

Can the PRs refuse to sign a variation?

Answer 44

Yes, if the assets held by them are insufficient to discharge the additional tax payable (eg if it was previously passed to a spouse but is now going to a non-exempt beneficiary)