11. Inheritance Tax

Question 1

What is inheritance tax?

Answer 1

A tax on the transfer of wealth

Question 2

What is lifetime tax?

Answer 2

Tax charged on certain assets called chargeable lifetime transfers (CLT’s) made throughout life.

Question 3

What can death tax be charged on?

Answer 3

• On the transfer of gifts made in the 7 years period

- On the value of assets transferred at the time of death

Question 4

Who is chargeable to IHT?

Answer 4

If an individual is UK domicile or deemed UK domicile, they will be liable to IHT on their worldwide assets.

If the individual is not UK domiciled, they are liable to IHT on their assets located in the UK.

Question 5

What transfers are exempt to IHT?

Answer 5

Transfers to a spouse or civil partner and charities and political parties.

Question 6

What is the diminution in value principle?

Answer 6

The fall in wealth of the person making the gift.

Question 7

What are the ways of valuing shares?

Answer 7

They will be valued at the lower of:
> the quarter up value
> average of the highest and lowest market bargains.

Question 8

How do you calculate the quarter up value?

Answer 8

Lower quoted price + 1/4( higher quoted price - Lowe quoted price)

Question 9

How do you calculate the average marked bargain value?

Answer 9

( highest marked bargain + lower marked bargain) /2

Question 10

When is there no value of transfer?

Answer 10

If there is no gratuitous intent or if the payment is for the maintenance of the family.

Question 11

What is a Potentially Exempt Transfer?

Answer 11

A lifetime transfer between individuals, unless is it a CLT or specifically exempt.

Question 12

What are the characteristics of a PET?

Answer 12

• Never any lifetime tax to pay.
• The PET will only become chargeable to death tax if the donor dies within 7 years of the transfer.
• If the donor loves longer than 7 years, the PET is exempt.

Question 13

What is a a Chargeable Lifetime Transfer?

Answer 13

A gift to a trust.

Question 14

What is a trust?

Answer 14

Where a party is appointed as a trustee to look after the assets of the beneficiary.

Question 15

When will a CLT be chargeable to IHT?

Answer 15

During its lifetime:
Lifetime tax is charged at 20%
- Use 20% if trustee pays tax (gift is gross)
- Use 20:80 if donor pays tax (gift is net)

Death tax is also payable if the donor pays within 7 years of the CLT

Question 16

What is the small gift exemptions

Answer 16

Lifetime transfers up to £250 per donee per tax year to individual, can be any number of donees.

Question 17

What is the marriage exemption?

Answer 17

• Up to £5,000 from a parent
• Up to £2,500 from a grandparent
• Up to £2,500 from one party of marriage to another
• Up to £1,000 by any other party

Question 18

What is the annual exemption for lifetime transfers and what are it’s conditions?

Answer 18

£3,000

• It will always be used against the first first gift in the year.
• Should be used after all other exemptions.
• Can be carried forward for one year only.

Question 19

What ‘normal expenditure’ is exempt?

Answer 19

• Normal expenditure out of income
• Typical or habitual payments over several years
• Made out of income instead of capital
• Doesn’t not affect the transfers of normal standard of living

Question 20

What are the rates of lifetime transfer?

Answer 20

0% up to nil rate band

20% on excess

Question 21

What is the nil rate band?

Answer 21

£325,000

Question 22

What are the steps to follow when calculating lifetime tax?

Answer 22

1) Deal with all transfers in the tax year in chronological order
2) Ignore exempt transfers
3) Value the transfers
4) Deduct:
- marriage exemption
- annual exemptions (chronological order)
5) If the transfer is a PET, ignore it for now
6) Calculate any tax due on CLTs

Question 23

What are the gross chargeable transfers?

Answer 23

A CLT will become part of the accumulated transfers and will have an impact on future calculations if any more gifts are made to the trusts in the next 7 years.

Question 24

What is death tax payable on?

Answer 24

• Lifetime gifts made in the 7 years before death

- The death estate

Question 25

What happens to gifts made more than 7 years before death?

Answer 25

They are not chargeable to death tax but may impact the value of accumulated transfers and thus reduce the nil rate band

Question 26

What does taper relief do?

Answer 26

Reduce IHT due on death if the donor survives at least 3 years after making the gift.
It is a reduction to the tax due after tax is calculated.

Question 27

What happens to lifetime tax already paid?

Answer 27

It can be deducted from the death tax, to reduce the tax to nil. It cannot result in a repayment.

Question 28

What are the steps to follow when working out taper relief on PETs and CLTs?

Answer 28

1) Identify the PET and CLT within 7 years prior to death
2) Work out the CGT
3) Calculate DT
4) Apply taper relief
5) Deduct lifetime tax paid
6) Repeat for each LT transfer

Question 29

What is the death estate?

Answer 29

The assets and liabilities belt at time of donors death.

Question 30

What can be deducted from the death estate?

Answer 30

• Life insurance payouts
• Funeral expenses
• Mortgage repayments
• Endowment mortgages repaid on death are not deductible
• Not gambolling

Question 31

What percent is death tax charged at?

Answer 31

40%

Question 32

What is the additional residential nil rate band?

Answer 32

£150,000, but the deceased’s home must be included in the estate and left to a direct descendent.

Question 33

What happens if the person does not use their nil rate band or additional nil rate band?

Answer 33

It transfers to their spouse, the value of which is the unutilised amount at the of the nil rate and additional nil rate bands at the receiving spouses date of death

Question 34

When do you pay IHT?

Answer 34

• Transfers between 6/4 and 30/9 > the tax is due but the next 30/4
• Transfers between 1/10 and 5/4 > the tax is due 6 months after transfer

Question 35

Death tax on lifetime transfers is paid by and suffered by:

Answer 35

Paid by - Donee

Suffered by - Donee

Question 36

Death tax on UK assets is paid by and suffered by:

Answer 36

Paid by - Executor

Suffered by - Residuary legatee

Question 37

Death tax on foreign assets is paid by and suffered by:

Answer 37

Paid by - Executor

Suffered by - Beneficiary