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TC > 22. TC - IHT: death estate and valuation > Flashcards

22. TC - IHT: death estate and valuation Flashcards

1
Q

When does the diminution in value principle apply?

A

Applies if only part of an asset is transferred in a lifetime transfer and the other part is retained by the transferor

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2
Q

How do you calculate thhe diminution in value?

A

The transfer is valued at the transferor’s loss in value as a result of the transfer

Value of estate before gift X
Value of estate after gift (X)
= Diminution in value X

For CGT the proceeds would be the MV of the parts transferred, not the value used for IHT

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3
Q

TYU1a Mr T owns 75% of A- team Ltd. He gives a 20% shareholding to his son during his lifetime

The values agreed with HMRc are:
75% holding £150k
55% holding £80k
20% holding £35k

Show the value of the shares transferred for the purposes of IHT

A

Value for IHT

Value of estate before: 75% holding £150k
Value of estate after: 55% £(80k)

Diminution in value / transfer value = £70,000

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4
Q

TYU1b Mr T owns 75% of A- team Ltd. He gives a 20% shareholding to his son during his lifetime

The values agreed with HMRc are:
75% holding £150k
55% holding £80k
20% holding £35k

Show the value of the shares transferred for the purposes of CGT

A

Proceeds = MV = £35,000

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5
Q

What impact does the related property rule have on IHT?

A

It prevents taxpayers from avoiding IHT by splitting the ownership of assets (e.g. land or shares) to reduce the value of their estates

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6
Q

What is the related property rule?

A

Where similar property is held by the following, the value of the related property is calculated as a proportion of the total property held by both parties

  • estate of the transferor’s spouse/ civil partner
  • A charity or political party which received the asset from the transferor (or their spouse/ CP) and held the asset within the last 5 years
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7
Q

TYU2a: Mr Baracus gifts the following shares to his daughter
Peck plc 10,000 shares
Quoted at 280p - 296p
Recorded bargains 282p, 286p, 294p

Calc the value of the shares transferred for the purposes of IHT

A

Lower of
1/4 up
280p + 1/4 x (296p - 280p) = £284p

Average of highest and lowest marked bargain 
 (282p + 294p)/2 = 288p 
Transfer value (10,000 shares @ 284p) £28,400
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8
Q

TYU2b: Mr Baracus gifts the following shares to his daughter
Peck plc 10,000 shares
Quoted at 280p - 296p
Recorded bargains 282p, 286p, 294p

Calc the value of the shares transferred for the purposes of CGT

A

280p + 1/2 (296p - 280p) = 288p

Proceeds (10,000 shares @ 288p)

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9
Q

What does the related property rule apply to?

A

Applies to IHT

NOT to CGT

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10
Q

What does the related property rule NOT apply to?

A

Applies to IHT

NOT to CGT

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11
Q

How is the related property value calculated for shares?

A

For shares, the proportion is calculated by the number of shares, not the value of the SH

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12
Q

Give some examples of valuation rules

A

Related property rules
Jointly owned property rule
Unit trusts rules
Life assurance policies

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13
Q

Describe the jointly owned property

A

Where property is owned jointly and it is not possible to dispose of one indie’s interests freely, a discount between 5-15% may be allowed from the full value of the interest

Discount doesn’t apply where where related property is held

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14
Q

Describe the unit trusts valuation rule

A

Value units in a unit trusts at their bid price (lowest price)

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15
Q

Describe the life assurance policies

A
  • If the policy relates to the indivs own life, including the proceeds (not the MV) of the policy in the death estate calc
  • If the policy is held in trust don’t include it in death estate: no IHT will be due on the proceeds
  • If the policy relates to someone else’s life include the MV of the policy in the death estate calc
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16
Q

TYU4: Rainbow Ltd has issued capital of 20,000 £1 shares.
Jeff owned 14,000 shares
his civil partner owned 2,000 shares
Zippy died leaving his SH to his friend Bungle

The following valued have been agreed
2,000 shares £4,500
16,000 shares £80,000

Show the value of Zippy’s shares for IHT purposes

A

Zippy
Valuation with related property
= 2,000/ (2,000 + 14,000) x £80,000 = £10,000

Valuation ignoring related property
2,000 shares £4,500

Therefore the related property value of £10,000 applies

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17
Q

Give some examples of debts and expenses that can be deducted in the computation of the death estate

A
  • Debts incurred prior to death (e.g. credit card bills for items bought prior to death), other than gambling debts
  • Taxes imposed by law (e.g. IT/CGT)
  • Unpaid debts only if the remain unpaid for a commercial reason and not as part of an arrangement to obtain a tax adv

Where a debt is charged on specific property (e.g. a mortgage) the debt is deductible primarily from the property on which it is charged

18
Q

What is quick succession relief?

A

QSR

It is a relief that is only available on the death estate

19
Q

What is quick succession relief?

A

QSR

It is a relief that is only available on the death estate

20
Q

Describe Stage 3

A

Calculating death tax (gifts 7 ears pre death and death estate only)

Along the top PET , CLT , Death estate

Down the side
Gross chargeable transfer X
Fall in value relief  (X)
Residence nil rate band available (X)
Nil rate band available (X)

= Taxable amount

Death tax at 40% X
Taper percentage %
Taered amount due X 
Lifetime tax paid (X) 
Quick succession relief (X)

Death tax payable (X)

21
Q

What impact does QSR have?

A

It reduces the IHT payable in the death estate if

  • Property has been acquired by the deceased in 5 years before death AND
  • There was a charge to IHT on the initial transfer
22
Q

When does QSR still apply?

A

Still applies where the asset is no longer held at date of death by the deceased

23
Q

What is the calc for QSR

A

QSR = tax paid on first transfer x (net transfer/gross transfer) x relevant %

Net transfer = amount received after IHT
Gross transfer = amount chargeable to IHT
Relevant % depends on time between first transfer and date of death

24
Q

How do you know which % to use for relevant % for QSR?

A

Relevant % depends on time between first transfer and date of death

Years between transfers - % applied 
0-1 yrs 100% 
1-2 yrs 80% 
2-3 yrs 60%
3-4 yrs 40%
4-5 yrs 20%
25
Q

How does QSR work for a specific legacy?

A

First legacy may be of a specific asset rather than the entire estate

In this case, the formula is rearranged to give:
QSR = net transfer x (tax aid on 1st estate/ gross 1st estate) x relevant %

i.e. = specific legacy x estate rate x relevant %

26
Q

When can the unused nil rate band be transferred?

A

The unused NRB at the death of a spouse/CP can be transferred to the surviving spouse/CP when they die

The increased NRB can be used on calcs of death tax for both lifetime transfers and death estate

27
Q

What happens to the NRB when the surviving spouse/CP died after a proportion of the NRB of their deceased partner?

A

When the surviving spouse/CP dies, the personal representative needs to make a claim to transfer the unused NRB by the later of

  • 2 years from the end of the month of death of the survivor
  • 3 months from the date the personal representatives first act for the survivor
28
Q

What is the deadline for the personal representatives making a claim to transfer the unused NRB when the surviving spouse/ CP dies

A

Later of

  • 2 years from the end of the month of death of the survivor
  • 3 months from the date the personal representatives first act for the survivor
29
Q

Can HMRC accept a late claim of the personal representatives making a claim to transfer the unused NRB when the surviving spouse/ CP dies

A

Yes

30
Q

TYU8: G died on 31 Dec 2019 leaving an estate of £1,250,000 entirely to his niece
He had made no lifetime gifts
In Sept 2017, G had been left £120k from his uncle’s estate
IHT of £160k was paid on a total chargeable estate of £720k as a consequence of his uncles death

Calc IHT due on George’s death

A

George
George’s death estate

Chargeable estate £1,250,000
Less: NRB (19/20) £(325,000)

Taxable £925,000

IHT @ 40% £370,000
Less: QSR (W) £(16,000)
IHT payable = £354,000

Working: QSR

The period between the deaths of Fred & George s more than 2 years but less than 3
QSR is therefore
( £160,000/ £720,000 ) x £120,000 x 60% = £16,000

31
Q

What is the resident nil rate band limited to?

A

Limited to the LOWER of

  • Net value of the property left to direct descendants (the open MV less any liabilities secured on it, e.g. mortgage)
  • the available band

Residence nil rate band for TY 19/20 is £150k

32
Q

What is the resident nil rate band for TY 19/20?

A

Residence nil rate band for TY 19/20 is £150k

33
Q

What is the residence nil rate band (RNRB) available against?

A

Only available for offset against the death estate and not lifetime transfers which have become chargeable to death tax

34
Q

How is the RNRB tapered?

A

For estates which are valued at more than £2m, the RNRB is reduced by £1 for every £2 that the value of the estate exceeds £2m

35
Q

What does RNRB stand for?

A

Resident nil rate band

36
Q

How can transfer of unused RNRB be done?

A

Unused proportion of the RNRB can be transferred to a spouse/ CP if the surviving spouse/ CP:

  • Leaves a home to their descendants
  • Includes the home in his/ he estate

The home in the estate doesn’t have to be the same home that the survivor lived in with the first of the couple to die, but the survivor must have lived in it at some stage

37
Q

What is the RNRB be limited to for the survivor

A
  • The net value of the property left to direct descendants
  • The available band (£150,000 for TY 19/20) x (100% + unused %)

If the first of the couple died before 6 April 2017, the death estate would not have used any of the RNRB as it was not available, so 100% of the RNRB will be unused (unless the first estate was worth more than £2m)

38
Q

Describe the transfer of unused RNRB with tapering

A

If the first of the couple to die left an estate valued at more than £2m, the RNRB available for transfer to the survivor is reduced by £1 for every £2 that the value of the estate exceeds £2m

39
Q

What is the value of the death tax?

A

Death tax is automatically charged at 36% on the death estate if at least 10% of the net chargeable estate left is left to charity

The net chargeable estate is the value of estate after all reliefs, exemptions and NRB but WITHOUT deducting the charitable legacy or RNRB

40
Q

What is the net chargeable estate for the payment of death tax?

A

The net chargeable estate is the value of estate after all reliefs, exemptions and NRB but WITHOUT deducting the charitable legacy or RNRB

41
Q

TYU11: Ian died on 26 Dec 2019, leaving an estate worth £2,130,000 to his children
This includes a home worth £450k

He had made no lifetime gifts
Calc the IHT payable as a result of Ian’s death

A

Chargeable estate £2,130,000
RNRB (85,000)
NRB at death (325,000)

Taxable = £1,720,000
Death tax at 40% 688,000

Working 
RNRB (lower of £150k and £450k) = £150k
Estate 2,130k 
Taper threshold (2,000k)
Excess = 130k
Reduction in RNRB x 1/2 = (65k) 
RNRB = RNRB £150k - £65k reduction = £85k
42
Q

TYU12: Philip died on 27 Feb 2017 and left his entire estate to his civil partner Vincent.
V died on 31 Dec 2019 leaving an estate of £1,250,000 including a home worth £400k to his daughter
Neither made any lifetime gifts

Calc the IHT payable as a result of Vincents death

A

Chargeable estate £1,250k

RNRB (lower of £150k x 200% and £400k) = £(300k)
NRB 19/20 £325k x 200% = £(650k)

Taxable = 1,250 - 300 - 650
= £300k

Death tax at 40% = £120k

TC (25 decks)

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