13.8 Inheritance Tax and Income Tax, capital Gains Tax for an Estate Administration Flashcards
Lifetime Transfers - Potentially Exempt Transfers (PETs)
Gifts to individuals are PETs and are not immediately chargeable to IHT. However, if the donor dies within 7 years, the PET becomes a chargeable transfer, and tax is payable by the recipient.
Lifetime Transfers - Chargeable Lifetime Transfers (CLTs)
If they die within the 7 years. Gifts into trusts are CLTs and may be immediately subject to lifetime IHT at rates of 20% (trustees pay) or 25% (donor pays). IHT is cumulative over a 7-year period
Lifetime Transfers - Taper Relief
If more than 3 years pass between a Potentially Exempt Transfers or Chargeable Lifetime Transfer and the donor’s death, taper relief may reduce the IHT payable. The relief ranges from 20% to 80% for deaths within 3-7 years
Lifetime Transfers - Business Relief
This relief reduces the value of business property given as a lifetime gift to a trust or at death. Relief can be 100% (e.g., sole trade, unlisted trading company shares) or 50% (e.g., controlling shares in a quoted trading company). Excepted assets not required for business use may reduce the relief.
Transfers on Death - IHT Rate
IHT is charged at a rate of 40% on the net value of the deceased’s estate exceeding the Nil Rate Band (NRB) which is £325,000.
Tell me about the Nill Rate Band
The current NRB is £325,000. PETs and CLTs within 7 years before death may use up the NRB. Unused NRB may be transferable to a surviving spouse. This would double the effective NRB.
Transfers on Death - What is the the Lower Rate for Charitable Bequests
If 10% or more of the deceased’s net estate is left to charity, the taxable estate is charged at a lower rate of 36%.
Transfers on Death - Quick Succession Relief
Can reduce IHT if a beneficiary dies relatively soon after inheriting property and IHT was paid on that property in the first death. The relief percentage decreases over time following the number of years.
What is the standard rate of IHT?
40% on the value of the estate exceeding the Nil Rate Band (NRB) and on chargeable transfers.
What lower rate applies to charitable gifts?
A lower rate of 36% applies to the taxable estate if 10% or more of the net estate is left to charity.
What is the percentage of IHT tax paid for Chargeable Lifetime Transfers if the trustees pay?
If the trustees pay the IHT, the lifetime rate is 20%
What is the percentage for Chargeable Lifetime Transfers if the donor (person making the gift) pays?
If the donor pays the IHT on a CLT, the rate is effectively 25% due to grossing up.
Residence Nil-Rate Band (RNRB)
An additional allowance when a qualifying residential property is closely inherited. The amount has increased over recent years (e.g., £175,000 in 2020/2021 and maintained until 2025/2026). Downsizing relief may be available.
Transfers on Death - Quick Succession Relief
Can reduce IHT if a beneficiary dies relatively soon after inheriting property and IHT was paid on that property in the first death. The relief percentage decreases over time
When does the IHT need to be paid and by who?
Personal representatives are responsible for paying IHT, generally before a grant of representation can be obtained. Interest accrues on unpaid IHT from 6 months after death.
IHT - Exempt Transfers (Examples)
Include gifts to a spouse or civil partner, gifts to UK charities, small gifts up to £250, some lifetime gifts on marriage, normal expenditure out of income ie maintenance of school fees, and a £3,000 annual exemption on lifetime transfers which applies for this year and the year before if not used
Income Tax for Estates in Administration
Personal representatives must file tax returns. Non-savings income and interest are taxed at the basic rate of 20%, and dividends at the dividend ordinary rate (e.g., 8.75%)
Capital Gains Tax (CGT) Figures for Estates in Administration
The capital gains tax rates for personal representatives are 20% on general gains and 28% (reducing to 24% as from 6 April 2024) for residential property.
Inheritance Tax (IHT) Exemptions for Gifts on Marriage
- A parent: up to £5,000
- A grandparent: up to £2,500
- Bride to the groom or vice versa (before the wedding): £2,500
- All others: £1,000
This exemption only is made once. Cannot gift multiple presents to the wedding. However the bride and groom can receive multiple gifts from different family members / relations
Business relief is available
during a lifetime gift or at death must have held the property generally for 2 years before. Although there are exceptions to the rule
what relief is available to agricultural relief?
100%
What activities are excluded from agricultural relief?
Grazing horses (except in connection with a stud farm) and land used for fishing, shooting, and other sporting rights.
How long must the transferor have held the agricultural land for the relief to apply? and what about farm land held as a tenant?
The agricultural property must have been occupied by the transferor for the purposes of agriculture throughout the 2 years prior to the transfer. For tenanted land, this minimum ownership requirement is extended to 7 years
In business relief, what is 100% relief due for?
- a sole trade business or partnership
- shares in an unlisted trading company
