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SQE1 - Tax > 2a. Inheritance Tax - Introduction and Lifetime Transfers > Flashcards

2a. Inheritance Tax - Introduction and Lifetime Transfers Flashcards

1
Q

What is the current inheritance tax nil-rate band (NRB), and what is the inheritance tax rate (IHT)?

A

£325,000. 40%.

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2
Q

When are lifetime transfers to trusts and companies chargeable to IHT?

A

Chargeable when made

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3
Q

When are lifetime transfers to individuals chargeable to IHT?

A

When the donor dies within seven years, and the transfer exceeds the NRB

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4
Q

The transfers of what assets are chargeable to IHT depending on whether the donor is domiciled (1) in the UK and (2) outside the UK?

A

Domiciled in UK: All worldwide assets, wherever situated
Not domiciled in UK: UK assets only

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5
Q

What is the term given to a non-domiciled donor’s assets located outside the UK?

A

Excluded property

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6
Q

What are the two primary considerations when determining whether a transfer is a chargeable transfer?

A
  1. Whether there has been a reduction in value in the estate as a result of the transfer
  2. Whether donor intended to make a transfer of value
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7
Q

Selling something below market value would cause a reduction in value of the estate. When is this not deemed a transfer for IHT purposes?

A

When the transfer is to an unconnected person and there is no gratuitous intent behind the lower price

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8
Q

What is one exception to the general rule that a reduction in value of the estate will render a transfer chargeable?

A

Expenditure on the maintenance of one’s family

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9
Q

How is transferred property valued if it is worth more when combined with property already owned by the recipient, e.g. 10% of shares transferred to someone who already owns 41% makes their entire holding more valuable on single-share basis?

A

The transferred property is valued at the higher amount

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10
Q

What is a potentially exempt transfer?

A

A lifetime gift which is neither exempt nor chargeable, but becomes chargeable if the donor dies within seven years

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11
Q

What is the spouse/civil partner exemption to IHT on both lifetime transfers and transfer on death?

A

Completely exempt from IHT

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12
Q

What is the exception to the spouse/civil partner exemption?

A

If the donor spouse in UK-domiciled and the recipient spouse is non-UK domiciled, only the first £325,000 is exempt

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13
Q

Gifts to charities in what locations are exempt from IHT and what is the monetary limit?

A

UK and EEA. No limit.

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14
Q

What is the value threshold for the small gift exemption to IHT on lifetime transfers and is there a limit on how many of these can be made in a year?

A

£250. No limit on number of transfers.

  • note - if any gifted amount to same person involves two or more £250 transfers in same tax year, then small gifts exemption is not applicable, even on first £250 transfer.
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15
Q

From when to when does the annual tax year run?

A

6 April of relevant (ie. 2023) to 5 April of following year (ie. 2024)

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16
Q

What does it mean that the small gift exemption is an all or nothing exemption?

A

If the gift exceeds £250 at all, the entire gift is chargeable, not just the portion which exceeds the threshold

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17
Q

What are the limits on exempt lifetime gifts on marriage for (1) a parent, (2) a grandparent, (3) bride to groom (vice versa), and (4) all others?

A
  1. £5,000
  2. £2,500
  3. £2,500
  4. £1,000
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18
Q

Is the wedding exemption all or nothing?

A

No

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19
Q

If the bride’s father gives a £5,000 gift to his daughter, and then a £1,000 gift to his son-in-law, are both exempt?

A

No. The limit applies per donor, per wedding

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20
Q

What is the normal expenditure out of income exemption to IHT on a lifetime transfer?

A

A recurring gift is exempt from IHT if the donor is left with sufficient income to maintain their normal standard of living, i.e. the donor was not trying to lower the value of their estate for IHT purposes

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21
Q

What is the annual exemption for lifetime transfers and can unused amounts be carried forward?

A

£3,000. Yes, unused amounts can be carried forward one year and a current year’s exemption is used before the previous one

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22
Q

If a donor dies within seven years of a PET, who is the tax payable by?

A

The recipient

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23
Q

What is a chargeable lifetime transfer?

A

A lifetime gift which is not exempt or potentially exempt

24
Q

What are two exceptions to the general rule that a lifetime transfer to a trust is immediately chargeable, and what are the reasons for both?

A
  1. Charitable trusts, because they are exempt
  2. Bare trusts, because they are PETs
25
Q

What two monetary amounts must be deducted before calculating the tax on a CLT?

A
  1. Remaining NRB
  2. Available exemptions, max of £6,000 if carrying over a full unused year
26
Q

What rate are LCTs taxed at (if made 7 years pre-death)?

A

Donor: 20%

27
Q

What is the cumulation period within which we need to assess previous gifts made for the purposes of determining the amount of the NRB remaining, and which if the cumulative amount exceeds the NRB, tax is payable?

A

Seven years

28
Q

When looking back at the cumulation period, what does it mean that the gross amount of the transfers is used?

A

In cumulating the transfers, use the amount transferred plus any tax paid by the donor

29
Q

Do LCTs and PETs both use up the NRB for the purposes of cumulation?

A

No. Just LCTs.

Remaining NRB is subtracted from PET after death, if within 7 years of gift.

30
Q

To summarise, what are the five steps for calculating lifetime tax?

A
  1. Identify the value transferred using the loss to donor principle
  2. Deduct annual exemptions to arrive at the CLT
  3. Identify the NRB for the year of transfer
  4. Deduct other chargeable transfers made within seven years
  5. Pay tax on the excess at 20%
31
Q

In determining tax owed on a potentially exempt transfer after death, what NRB and tax rates are operative?

A

The ones at the date of death

32
Q

In determining tax owed on a potentially exempt transfer, from what period do we look back seven years?

A

Seven years from the date of the PET, not death

33
Q

After what period between the PET and death does taper relief kick in?

A

3 years

34
Q

What is the process for tapering tax payable on a PET?

A

First calculate the full tax owed, and then reduce that monetary amount by the relevant %

35
Q

What are the four taper percentages available to PETs where the donor dies (a) 3-4 years, (b) 4-5 years, (c) 5-6 years, and (d) 6-7 years after the PET?

A

3-4 years: 20%
4-5 years: 40%
5-6 years: 60%
6-7 years: 80%

36
Q

What are the three steps for working out additional tax payable at death on a LCT?

A
  1. Start with LCT
  2. Calculate NRB remaining
  3. Pay tax at 40%
37
Q

What taper relief is available to tax payable at death on a CLT?

A

The same as with PETs. Kicks in after three years.

38
Q

What is the one difference in calculating death tax on a CLT compared to a PET?

A

With a LCT, whoever paid any lifetime taxes will get a tax credit

39
Q

If the lifetime taxes were overpaid, will a repayment be issued upon death to reflect this?

A

No

40
Q

What is business relief for IHT?

A

The value of business property given as a lifetime gift to a trust or at death is reduced before any annual exemptions, and occurs automatically if the conditions are satisfied

41
Q

What are the two % amounts for business relief?

A

100% relief and 50% relief

42
Q

What two assets qualify for 100% business relief?

A
  1. Sole-trade business or partnership interest
  2. Any number of shares in unlisted trading company

AND
owned for at least 2 years, or been a replacement asset with combined ownership of 2 years.

43
Q

What two assets qualify for 50% business relief?

A
  1. Shares in a listed company if the donor owns 50% or more
  2. Land, buildings, and plant/machinery owned by an individual but used by a company they control (50%+ ownership) or partnership in which they are a partner
  • owned for at least 2 years.
44
Q

What type of business is not eligible for business relief?

A

One whose trade it is to make or hold investments

45
Q

What is the situation where shares are gifted in a business that holds some assets as investment?

A

The relief is restricted to the trading and not investment proportion

46
Q

Are shares in overseas businesses eligible for business relief?

A

Yes

47
Q

What is the general rule as to how long a donor must have owed property before the transfer before it qualifies for business relief?

A

Two years

48
Q

What are two exceptions to the two year ownership requirement to qualify for business relief?

A
  1. Replace one business property asset with another within three years
  2. Inheriting business property assets from spouse
49
Q

What is agricultural relief?

A

Similar (and available in addition) to business relief, but applies to farmland and farm buildings, and normally available at 100%

50
Q

What is agricultural property and what are the geographical limits of this relief?

A

Land or buildings used for the purposes of agricultural, within UK, Channel Islands, Isle of Man, or EEA

51
Q

What are the two types of people to whom agricultural relief will apply?

A
  1. Farmer who owns the land and buildings and uses these in their own business
  2. Landowner who is letting out agricultural land to a farmer
52
Q

To qualify for agricultural relief, must the landowner farm the land themselves?

A

No

53
Q

What types of activities taking place on land will preclude agricultural relief?

A
  1. Grazing horses (except for a stud farm)
  2. Fishing, shooting, or other sporting rights
54
Q

For how long before the transfer must the land have been owned in the case of (1) occupation by the transferor and (2) where the transferor was letting out the land?

A

Occupation by transferor: Two years
Tenanted land: Seven years

55
Q

When will business relief and agricultural relief be available at the same time, and what is the priority of these reliefs?

A

When a farmer runs a farming business.

Agricultural relief applies first to the agricultural value of the property, and business relief may be applied to the excess value in respect of assets used in the farming business which are not agricultural property

56
Q

When will business relief not be available in addition to agricultural relief?

A

When the farmland is let out by the landowner

57
Q

Regarding what one type of gift will business and agricultural relief have immediate effect, and why?

A

Only LCTs, because PETs are not immediately chargeable

SQE1 - Tax (8 decks)

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