Wills Unit 3 Flashcards
Discounts to compensate for the difficulty of selling a share of jointly owned land (does not apply to spouses)
Normally 10% for commercial property and 15% for residential property.
Valuing quoted shares
Value taken from the Stock Exchange Daily Official List for the date of death (or nearest trading day).
Shows two values. Figure out the difference between them and add 1/4 of it to the lower value.
Spouse exemption
Property that passes to the deceased’s spouse is exempt from IHT.
If the transferee is not domiciled in the UK this is limited to £325,000.
Charity exemption
Any property that passes to charity is exempt for IHT purposes. If at least 10% of the estate goes to charity, the taxable rate of the excess drops to 36% (the special rate).
Business Property Relief (BPR)
Only applies to businesses that are trading in nature.
100% reduction applies to unquoted shares (interests in businesses not listed on a recognised stock exchange) and includes partnership shares.
50% reduction applies if the transferor had voting control (over 50%) of a business listed on a recognised stock exchange. Or land, buildings, machinery or plant owned personally but used for business purposes for a partnership where they are a partner or a company that they have voting control of.
(Test satisfied if couple have voting control together)
MUST HAVE BEEN OWNED FOR AT LEAST 2 YEARS.
Agricultural Property Relief
For any relief, it must have been occupied by the transferor for at least 2 years for the purposes of agriculture or owned by the transferor for 7 years and occupied by someone else for the purposes of agriculture throughout.
100% reduction where transferor had a right to vacant possession immediately before the transfer or where property subject to a letting.
50% reduction in other cases.
Nil Rate Band (NRB)
First £325,000 is taxed at 0%. Excess is taxed at 40% unless special charity rate applies.
Spouse’s NRB will be added to this if not used. Therefore potential to have £650,000 as a NRB.
If the deceased made any chargeable transfers in the 7 years prior to death, the cumulation principle will apply.
Residential Nil Rate Band (RNRB)
This applies only to residential properties that have at some point been the deceased’s residence. This is £175,000.
To apply, it must be closely inherited: this means issue or the spouse of issue or the widow/widower of issue as long as they have not remarried before the deceased’s death.
If the estate is valued at £2 million or more, the RNRB reduces by £1 for every £2 over the threshold it is.
Any of the deceased spouse’s unused RNRB can be claimed by the deceased leaving the potential to be £350,000.
Potentially Exempt Transfers (PETs)
Any lifetime disposition that reduces the value of the estate.
Dispositions for the maintenance, education or training of their child under 18 or child of majority in full time education or training or the maintenance of a dependant relative are all excluded from this definition.
The value transferred is the loss of the estate. The related property rules exist to prevent tax avoidance in relation to groups of assets.
Exemptions and reliefs for PETs
Spouse and charity exemptions still apply.
Business and agricultural reliefs still apply. However, the BPR will be withdrawn if the transferee does not own the business property still at the date of death.
Lifetime Only Exceptions
The annual exemption - £3,000 per tax year. Maximum of £6,000.
Small gifts - £250 or less are exempt.
Normal expenditure out of income - part of normal expenditure, made out of transferor’s income and after allowing for all such payments, the transferor was left with sufficient income to maintain their usual standard of living.
Gifts in consideration of marriage - £5,000 by parent of a party to marriage, £2,500 by a remoter ancestor of a party to the marriage, £1,000 in any other case.
Lifetime Chargeable Transfers (LCTs)
Lifetime transfer into any trust or to a discretionary trust of a company.
These are taxed at 0% for the first £325,000 (the NRB) and then taxed at 20% on the excess.
After death, IHT is then recalculated using the cumulation period. Now recalculated at 40% after the NRB. Any IHT already paid is taken off the sum of IHT payable on death.
Tapering Relief
Relevant to PETs that have become chargeable. Available if survived 3 years after the transfer. Reduces any tax payable on the PET.
80% payable within 3-4 years
60% payable within 4-5 years
40% payable within 5-6 years
20% payable within 6-7 years
What happens if the IHT upon recalculation is lower than that already paid?
Not refunded however the difference is counted as credit.
IHT liability when the deceased transferred the property in their lifetime but continued to benefit until death?
The transferee is liable for the tax attributable to the property (use the estate rate).
However, if the tax remains unpaid for 12 months after the end of the month of death, then the PRs become liable for the tax.
Liability for IHT on PETs
Initially the transferee. However, PRs become liable if the tax remains unpaid 12 months on from the end of the month of the date of death.
Liability for IHT on LCTs
Primarily the transferor although HMRC can claim from the trustees.
If the transferor pays, the amount of tax is more than if the trustees paid because grossing up is used in the case of the transferor. This is because tax is calculated on the amount of value transferred.
Burden of IHT
If the will is silent, the default position is that property that vests in the PRs is payable as a testamentary expense whereas property that passes on survivorship as beneficial joint tenants passes the burden to the surviving joint tenant.
Disclosure of Tax Avoidance Schemes (DOTAS)
To constitute a notifiable arrangement, one of the main purposes must be to enable a person to obtain a specific listed advantage and the arrangements must involve one or more contrived or abnormal steps without which a tax advantage could not be obtained.
General Anti-Avoidance Rule (GAAR)
GAAR is intended to enable HMRC to counteract abusive tax arrangements.
An arrangement constitutes as such if it would be reasonable to conclude that obtaining a tax advantage was one of the main purposes and it is abusive if entering the arrangement cannot reasonably be regarded as a reasonable course of action.
On HMRC to show that it is abusive.
HMRC may counteract the abuse and impose a penalty if appropriate.
