23. TC - IHT: reliefs and other aspects Flashcards
What is business property relief available for?
Available on both lifetime transfers (before other exemptions) and transfers on death
What does BPR stand for?
Business property relief
How is business property relief calculated?
Stage 1 - calc the chargeable amount
Chargeable amount = - Transfer X BPR/APR (X) Marriage exemption (X) Annual exemption CY & PY (X) (X) Chargeable amount X Calc'ed for each transfer
BPR is available under certain circumstances
When is business property relief available?
If ALL the following conditions are met:
- Relevant business property is transferred
- The property has been owned for the qualifying ownership period (usually 2 years)
- The transfer is not part of a contractual obligation to sell (cross options don’t amount to contracts for sale)
There are add’l conditions for BPR for lifetime transfers
What relief applies to relevant business property
Where a transferor makes a transfer of value of an asset which qualifies as relevant business property, relief applies to reduce the value of the transfer made by either 100% or 50%
What does the amount of BPR depend on?
Business property relief available depends on the type of relevant business property being transferred
Does relevant business property have to be in the UK for BPR to be available/.
No it can be anywhere in the world
Can dormant companies get BPR?
No, the business of the sole trader, ship or company must be a trading business
Is related property taken into account when considering control?
Yes
How long must a property have been owned by the transferor to qualify for BPR?
Transferor must have owned the property for the 2 years immediately prior to the transfer
Though there are some exceptions to the rule
What are the exceptions to the run that the transferor must have owned the property for the 2 years immediately prior to the transfer to be available for business property relief?
- Where the property replaced other business property (directly/ indirectly) the transferor must have one the assets for a combined period of at least 2 years out of 5 years prior to the transfer
- Where the property was inherited on the death of a spouse/CP, ownership by the deceased spouse is counted as ownership by the transferor
- Where there are successive transfers of the same property, one of which was on death and the first transfer of property qualified for BPR, the 2 year ownership requirement on the second transfer is ignored
TYU1: Donna bought some shares in ABC Ltd, an unquoted trading company, on 1 May 2013
She sold the shares on 1 Oct 2018 and on 1 Nov 2018 used the proceeds to buy more shares in XYZ Ltd, another unquoted trading company
Donna gave the shares to her daughter Bella on 1 July 2019
State whether BPR applies to the transfer to Bella
Donna had not owned the shares in XYZ Ltd for 2 years before the transfer on 1 July 2019 (she had owned them since 1 Nov 18)
However, since the shares in XYZ Ltd replaced the shares in ABC Ltd and the period of ownership in the 5 years before transfer exceeded 2 years in total (1 July 14 - 1 October 18 and 1 Nov 18 - 1 July 19) the ownership requirement for this transfer is satisfied
What are expected assets?
Expected assets are those which have not been used wholly/ mainly for business purposes throughout the 2 years prior to the transfer and are not required for future use in the business (e.g. large cash balances/ investments)
What are the additional conditions for BPR for lifetime transfers?
In addition to the general conditions
- If the transferor dies within 7 years of a lifetime transfer, the transferee must still own the business property at the transferor’s death for the transfer to qualify for BPR
- The property must also still be relevant business property at the date of the transferors death
TYU2: Lucas owned a 30% SH is C Ltd, a trading company, for many years.
He gave the shares to his daughter when they were worth £45k
At the time of transfer, C Ltd had net assets of £1.5m
Included in this was £80k relating to a building which had ceased to be used in the trade 9 months previously and was now surplus to bus requirements
Calc the transfer of value on the gift by Lucas.
Lucas
Value of shares £45,000
Less: BPR
£45k x (£1.5m - £80k)/£1.5k x 100% = £(42,600)
Transfer of value = £2,400
What must be done where BPR was given in the donor’s lifetime on a CLT but isn’t available on death?
- Add back BPR to calc the additional death tax due
- But use lifetime tax value (i.e. including BPR) for nil rate band purposes
What must be done where the transfer was a PET and where BPR was given in the donor’s lifetime?
Death tax is calculated on the unreduced value, which is also used for cumulation purposes
When is Agricultural property relief given?
Given before all other exemptions (including BPR)
What does APR stand for?
Agricultural property relief
What does BPR stand for?
Business property relief
What is APR available on?
Available on the agricultural
What is APR available on?
Available on the agricultural value of both lifetime transfers and transfers on death of farms, farm buildings and agricultural land situated in the UK, Channel Islands, Isle of Man and the EEA
Available at 100% except for property let out before 1 Sept 1995 which has more than 24 months to run on the lease
What must a property be to qualify for APR?
Property must be
- Occupied by the transferor and used for agricultural purposes for 2 years before the transfer
- Owned by the transferor for 7 years before the transfer and used by someone else for agricultural purposes
What are the additional conditions for APR for lifetime transfers?
If the transferor dies within 7 years of a lifetime transfer, the transferee must still own the agricultural property at the transferor’s death in order for the transfer to qualify for APR
- The property must also still be relevant agricultural property at the date of the transferor’s death
How is replacement property treated for APR?
Replacement property (where the asset originally qualifying for APR was sold and all of the proceeds were reinvested in the new property within 2 years) is treated as if it were the original property
When is a property deemed a ‘replacement property’?
where the asset originally qualifying for APR was sold and all of the proceeds were reinvested in the new property within 2 years
What must be done where APR was given in the donor’s life time on a CLT but isn’t available on death?
Add back APR to calc the additional death tax due
Use the lifetime tax value (i.e. including APR) for nil rate band purposes
How is death tax calculated if the transfer was a PET?
Death is calculated on the unreduced value which is also used for cumulation purposes
Describe attributable liabilities
The value of BPR/APR asset needs to be reduced to the extent of any liability taken out to acquire, maintain or enhance the value of the relevant asset
BPR/APR only applies to the net value of the asset, after deduction of the attributable liability
TYU4: Juan owns 40 acres of farm land in Suffolk.
In July 2019 he transfers the farmland to a discretionary trust when the land is worth £600k
The agricultural value of the land is £450k. The farmland has been leased to a neighbouring farmer on a 20 year lease since 1 Jan 2002
Calc the value of the transfer after APR
Ignore exemptions
Juab
Transfer of value £600k
Less: APR (£450k x 100%) £(450k)
Transfer of value after APR = £150k
Note: BPR is not available on the remaining value as Juan does not farm the land himself
What does a domicile of the donor the key to?
Key to determining which sites will be taxable for IHT
Which assets are taxable for UK domiciled individuals?
Worldwide assets
Which assets are taxable for deemed UK domiciled individuals?
Worldwide assets
Which assets are taxable for non-UK domiciled individuals?
UK assets only
What is deemed domicile for IHT cases?
Any of the following cases
- The indiv was resident in the UK for at least 15/20 TY and including at least 1/4 tax years ending with the current tax year
- The indiv is a formerly domiciled resident for the TY
When is an indiv a formerly domiciled resident (or ‘returning UK dom’)
If they
- Were born in the UK with a UK domicile of origin
- Resident in the current tax year
- Was resident in the UK n at least 1 of the 2 tax years prior to current year
How is the location of an asset determined?
Depends on the asset
L&B- physical location
Shares - where the company is registered
Chattels - physical location
Debt - where the debtor resides
Cash at bank - branch location
Life policies - where the proceeds are payable
Interest in partnership/ goodwill - where business is carried on
Where is the deemed location of L&B?
Physical location
Where is the deemed location of shares?
Where the company is registered
Where is the deemed location of chattels?
Physical location
Where is the deemed location of debt?
where the debtor resides
Where is the deemed location of cash at bank?
branch location
Where is the deemed location of life policies ?
Where the proceeds are payable
Where is the deemed location of interest is partnership / goodwill ?
Where business is carried on
What must be done if the location of assets is overseas?
Overseas assets should be translated to sterling at the date of death using the exchange rate which gives the lowest value
What can be deducted from the assets in death estates situated abroad?
Where assets in a death estate are situated abroad, additional expenses are incurred of up to 5% of the value of the asset may be deducted from the value of the overseas property
What does the transfer between spouses depend on?
Depends on the domicile status of them
All transfers are exempt if transferee and transferor are UK domiciled
and transfers are exempt if transferee is UK domiciled and transferor is non-UK domiciled
Transfers up to lifetime limit are exempt if transferee is non-UK domiciled and transferor is UK domiciled
What is the tax treatment of transfers between spouses/ civil partners if:
Transferee is UK domiciled
Transferor is UK domiciled
All transfers are exempt
What is the tax treatment of transfers between spouses/ civil partners if:
Transferee is non-UK domiciled
Transferor is UK domiciled
Transfers up to lifetime limit are exempt (£325,000)
What is the tax treatment of transfers between spouses/ civil partners if:
Transferee is UK domiciled
Transferor is non-UK domiciled
All transfers are exempt
What is the tax treatment of transfers between spouses/ civil partners if:
Transferee is non-UK domiciled
Transferor is non-UK domiciled
All transfers are exempt
What is the lifetime limit for transfers from a UK domiciled indiv to their non-UK domiciled spouse/civil partner?
£325,000
Can a non-UK domiciled spouse/CP make an election to be treated as UK domiciled for IHT?
Yes
But the election can’t be revoked
But ceases to be effective if the indiv is non-UK resident for 4 consecutive years
If the election is made the taxpayer’s worldwide assets will be within the scope of the UK IHT
How does DTR work for IHT?
DTR is available against the UK inheritance tax liability where assets have been subject to double tax
Treaty relief is considered first
But if no treaty exists DTR is given as a tax credit on the lower of
- > the overseas tax liability
- > the UK IHT (at the average rate) on the asset
Who are an individuals personal representatives?
The executors appointed in their will or the administrators of the estate if no will was made
When will HMRC issue a notice of determination showing the IHT payable?
When the accounts are submitted
OR when HMRC believes IHT is payabe
What is the deadline for which the transferor (or their personal representatives) must provide HMRC with details of transfers chargeable to IHT
depends on the nature of the transfer
What is the due date for payment of IHT?
Depends on the nature of the transfer
Who is the person primarily liable for IHT?
Depends on the nature of the transfer Event - Inheritance tax paid by Lifetime tax on CLT - Transferor Death tax on CLT - Transferee PET - Transferee Death Estate - Personal representatives
Who pays the IHT on lifetime tax on CLT?
Transferor
Who pays the IHT on death tax on CLT?
Transferee
Who pays the IHT on a PET?
Transferee
Who pays the IHT on death estate?
Personal representatives
When does interest run for lifetime transfers?
Interest runs from the due date to the day before the inheritance tax is paid
When does interest run for death estate?
Runs from 5 months after the end of the month of death to the day before the inheritance tax is paid
Can IHT be paid in instalments?
Yes, an election can be made to pay in 6 equal instalments for
- Lifetime tax on a CLT where the transferee pays the tax
- Death tax on CLTs and PETs where the transferee still owns the property at the transferor’s death
- Death tax on the death estate
When is the first instalment due for lifetime tax?
Due on the date the whole amount would have been due
When is the first instalment due for death tax?
Due at the end of the 6 months following the date of death
When is IHT due if the property is sold?
If prev paid in instalments, and the property is sold, the remaining IHT is due immediately
What are interest-bearing instalments available on?
The following assets
- Unquoted shares and securities which don’t qualify for BPR
- Businesses and interests in businesses (including partnerships) which don’t qualify for BPR
- Land
When does interest accrue for late paid instalments?
From the due date to the day before the payment is made
What is the interaction/ between IHT and CGT
Gifts on death are subject to IHT but are exempt from CGT
A PET doesn’t have an immediate IHT charge but could have CGT if it is a transfer of a chargeable asset
A CLT is subject to both IHT and CGT (if a chargeable asset) immediately
What is the difference in treatment for the gift of an asset for CGT vs IHT?
CGT - chargeable disposal at time of gift unless exempt (e.g. cash/PPR)
IHT - Generally, no tax due unless donor dies within 7 years (PET)
How does the value of assets differ for CGT vs IHT?
CGT- Market value
No related property rules apply- value on a stand-alone basis
Quoted shares are valued under the 1/2 up value
IHT - Fall in value of donors estate
Related property rules apply
Quotes shares are valued at the lower of 1/4 up and average bargain price
How does the reliefs available differ for CGT vs IHT?
CGT
- Gift relief
- -> Defers gain until sale by donee
- -> Available on business assets/ shares
- Entrepreneurs’ relief
- -> Reduces tax rate to 10%
- -> May be available on the gift of a business/ shares
IHT
- Business property relief (BPR)
- -> Reduces taxable amount
- -> Available on business assets/shares
- Taper relief
- -> Reduces tax payable on PETs if donor dies within 3-7 years of making the gift
How does the rate of tax differ for CGT vs IHT?
CGT
- 10%/ 20%/ 18% / 28%
IHT
- PET
- -> No tax in lifetime
- -> If donor dies within 7 years - 40% (after applying nil band of £325k)
- CLT
- -> 20% if donee pays (after applying nil band of £325k)
- -> 25% if donor pays (after applying nil band of £325k)
How do exemptions vary for IHT vs CGT?
CGT
- Annual exempt amount £12k
IHT
- Annual exemption- £3k (+ £3k b/f from prior year if applicable)
- Small gifts/ marriage/ gift out of income exemption if applicable
How do exemptions vary for IHT vs CGT?
CGT
- Annual exempt amount £12k
IHT
- Annual exemption- £3k (+ £3k b/f from prior year if applicable)
- Small gifts/ marriage/ gift out of income exemption if applicable
How does planning differ for IHT vs CGT?
CGT
- Husband and wife - transfer assets at NGNL
- -> Use both AEAs
- -> Use both basic rate bands
- -> Use losses
IHT
- Gusband and wife - exempt transfer
- -> unused proportion of NRB/ RNRB from death of 1st spouse can be transferred to 2nd spouse
