2b. Inheritance Tax - Death Estate, Post-Mortem Reliefs, Anti-Avoidance, and Payment of IHT

Question 1

At the point of death, what is the deceased deemed to have made a chargeable transfer of?

Answer 1

The net value of their assets at the date of death

Question 2

What is the net value of assets?

Answer 2

Total value of the assets owed by the deceased, less funeral expenses and any debt or liabilities owed by the deceased, but not probate costs

Question 3

Is the annual exemption available to reduce the value of the chargeable death estate?

Answer 3

No

Question 4

What are the three steps for calculating tax on death?

Answer 4

1. Start with NRB for year of death
2. Reduce NRB by chargeable transfers within seven years of death
3. Tax the excess at 40%

Question 5

What gifts are exempt from IHT on death?

Answer 5

1. Gifts to spouse/civil partner
2. Gifts to UK/EEA charities

Question 6

What is the exception to the spouse exemption?

Answer 6

If the deceased was UK-domiciled but spouse is not, the limit is the NRB or £325,000

Question 7

What are two exceptions to the general rule that the value of an asset is its market value at the date of death?

Answer 7

1. Quoted shares
2. Jointly owed assets

Question 8

How are quoted shares valued?

Answer 8

Per the official list published by the Stock Exchange at the date of death

Question 9

How are jointly owned assets valued?

Answer 9

Related property rules apply

• i.e. we take a higher valuation if the property is worth more combined with property already owed by the recipient.

Question 10

In addition to non-UK assets owned by non-UK domiciled individuals, what are two types of interests that are considered excluded property?

Answer 10

1. Policies written in trust for third-party beneficiaries
2. Interests in a discretionary trust

Question 11

What are three liabilities that can be deducted from the estate, and what is one that cannot be?

Answer 11

Can deduct:
1. Mortgages
2. Income tax owed
3. Reasonable funeral expenses

Cannot deduct:
Probate costs

Question 12

What % of net estate or baseline amount must be given to charity to benefit from a lower IHT rate, and what is that rate?

Answer 12

10% of estate or baseline amount must be given to charity for the IHT rate to be reduced to 36% from 40%

Question 13

For the purposes of the charity rate reduction, what is the baseline amount?

Answer 13

Value of estate chargeable to IHT after deducting all available reliefs, exemptions, and the available NRB, but excluding the actual portion given to charity

Question 14

What is the transferable nature of the NRB?

Answer 14

If an individual dies leaving some or all of their NRB, a claim can be made for the unused amount to be transferred to their spouse, who will then have an uplifted NRB
- ie. benefit from max combined NRB + TNRB value = £600,000

Question 15

How is the uplifted NRB calculated?

Answer 15

Uplift the spouse’s current NRB at its current rate by the deceased’s unused % of their NRB at the rate at the time

Question 16

What is one thing an uplifted NRB cannot be used for?

Answer 16

Lifetime tax on CLTs

Question 17

How is an uplifted NRB claimed in practice?

Answer 17

On the death of the first spouse, it is recorded as part of the second spouse’s NRB. Upon the second spouse’s death, their executors make the claim

This is why it cannot be used for spouse 2’s CLTs

Question 18

Can an individual claim an uplifted NRB from more than one deceased spouse?

Answer 18

Yes, but the uplift is capped at 100% on top of their own NRB (i.e. double their NRB)

Question 19

What two criteria must be satisfied for the residence nil-rate band (RNRB) to be available in addition to the regular NRB?

Answer 19

1. Estate includes a home that was used as the deceased’s private residence at some point, and
2. Home or its sale proceeds are left to lineal descendants or spouses of such

Question 20

What is the maximum relief available under the RNRB?

Answer 20

£175,000

Question 21

To avail of the RNRB, is it necessary for the descendants to occupy the property after death?

Answer 21

No

Question 22

Does the RNRB apply to lifetime transfers?

Answer 22

No, to the death estate only

Question 23

At what total estate net valuation does the RNRB begin to taper away, what is the rate of taper, and therefore at what total estate valuation is the RNRB effectively lost?

Answer 23

£2 million.

£1 taper for every £2 over.

Effectively lost at £2.35m.

Question 24

What is net valuation for the purposes of RNRB taper?

Answer 24

Assets minus liabilities, but before deducting reliefs

Question 25

What are the two main reasons why RNRB would be left over to uplift that of the deceased’s spouse?

Answer 25

1. First spouse did not have a qualifying home
2. First spouse did not have or leave home to lineal descendants

Question 26

Can an individual claim an uplifted RNRB from more than one deceased spouse?

Answer 26

Yes, but like the NRB, the uplift is capped at 100% on top of their own RNRB (i.e. double their RNRB)

Question 27

What is the downsizing uplift in the context of RNRB?

Answer 27

Where a residence valued in excess of the RNRB is sold and replaced with a new residence which is valued at less than the RNRB or is gifted in a way which some of the RNRB will be unused, an uplift can be claimed reflecting the amount of RNRB which could have been used if it was the more expensive property that was gifted.
- ie. use value of OG home.

Question 28

When is quick succession relief available?

Answer 28

When an individual’s estate increased due to a chargeable transfer made to them in the five years before their death

Question 29

Under quick succession relief, by what % is the relief reduced for each year between the donor’s death and the recipient’s death?

Answer 29

20%

Question 30

To apply for quick succession relief, does the deceased recipient still have to own the property at the date of death?

Answer 30

No

Question 31

In what three circumstances can a claim be made to substitute a lower value in the death for assets which have been sold by personal representatives after death?

Answer 31

1. Quoted shares (sold at a loss within 12 months)
2. Land and buildings (sold at a loss within 3 years)
3. Woodlands relief

Question 32

When is the lower substitute value available in the context of quoted shares?

Answer 32

Where PRs sell quoted shares at a loss within 12 months of the date of death

Question 33

When is the lower substitute value available in the context of land and buildings?

Answer 33

Where PRs sell land or buildings at a loss (pooled if multiple sales) within three years of the date of death

Question 34

In the context of substituting a lower value for land and buildings, how are profits and losses in the fourth year treated?

Answer 34

Losses can count toward the relief. Profits are ignored.

Question 35

In what circumstance might woodlands relief be available?

Answer 35

Deceased had land that was not eligible for agricultural or business relief, but on which trees and underwood are growing

Question 36

To qualify for woodlands relief, how long must the deceased have had a beneficial entitlement to the land?

Answer 36

Five years prior to death

Question 37

How does woodlands relief operate?

Answer 37

It excludes the value of the woodlands from the estate

Question 38

Whilst woodlands relief applies to trees, what does it not apply to?

Answer 38

The value of the land upon which trees are growing

Question 39

What is a gift with reservation of benefit?

Answer 39

Where an individual gives away an asset but continues to be able to benefit from that asset, it is still treated as part of the donor’s estate at the date of death

Question 40

What action can the donor take to negate the rules on gifts with reservation of benefit in the context of giving away a house but continuing to live in it?

Answer 40

Pay market rent to the recipient
- note - if it is nominal rent, then it will be a GWROB.

Question 41

How can a donor who would otherwise be deemed to have made a gift with reservation of benefit avoid the rule?

Answer 41

Release the benefit, e.g. move out of the house, before death

Question 42

Where a benefit is released before death, how does HMRC treat the release?

Answer 42

As a PET valued at the date of release

Question 43

In the context of gifts with reservation of benefit, when will Pre-Owned Asset Tax apply?

Answer 43

When the rule has been avoided by, e.g., selling a house, making a cash gift which is used by the donee to purchase a property in which the donor lives rent free

Question 44

When is IHT payable on a CLT?

Answer 44

Later of:

1. Six months from the end of the month in which the CLT was made, or
2. 30 April after the tax year in which it was made

Question 45

Who has primary liability to pay IHT on a CLT, and who can HMRC pursue if this party fails to pay?

Answer 45

Donor. HMRC can pursue recipients, or even beneficiaries in extreme cases.

Question 46

When is additional death tax is payable on a CLT due, and who is liable to pay it and why?

Answer 46

*Six months *after the end of the month in which the death occurred. Trustees are liable as the donor is dead.

Question 47

When is death tax on a PET which has become chargeable due, and who is liable to pay it?

Answer 47

Six months after the end of the month in which the death occurred. Recipient is liable.

Question 48

In the case of both CLTs and PETs, who may become liable if the tax remains unpaid 12 months after the date of death?

Answer 48

The PRs

Question 49

When is IHT due for a transfer on death?

Answer 49

Six months after the end of the month in which the death occurred

Question 50

What is the liability and what is the burden with regard to tax?

Answer 50

Liability: who must pay tax
Burden: the source of the funds used to pay tax

Question 51

Who is liable for and who has the burden of IHT in the case of freehold property?

Answer 51

Liable: PRs
Burden: Residuary legatee, if will silent

Question 52

Who is liable for and who has the burden of IHT in the case of settled property in which the deceased had an interest?

Answer 52

Liable: Trustees
Burden: Trust assets

Question 53

Who is primarily liable for tax attributable to property subject to a gift with reservation of benefit?

Answer 53

Donee. PRs liable if not paid within 12 months.

Question 54

Who is liable for tax on property passing outside a will or intestacy and who ultimately bears the burden?

Answer 54

PRs liable. Beneficiaries bear the burden.

Question 55

If IHT is agreed to be paid in installments, how many annual installments must be paid and what is the due date for the first one?

Answer 55

10 installments. First one due on the normal tax due date.

Question 56

Why is it tax efficient to make lifetime gifts of appreciating assets?

Answer 56

Because for IHT purposes, it is the value at the date of transfer, not death, that applies

Question 57

Will the value of a deceased’s life tenancy interest in a lifetime trust be included in the assets of his taxable estate?

Answer 57

Yes if life tenancy interest arose when trust arose following settlor’s death (will trust) - take into account total value of life interest.

cf. if formed during settlor’s lifetime, then only consider potential receipt of income from trust.

Question 58

What form must be submitted to HMRC, and when will it not be necessary?

Answer 58

Form IHT400
- unless estate is excepted.

Question 59

What are the two different ways an estate may be ‘excepted’?

Answer 59

If it falls below NRB value, provided estate’s gross did not exceed £3 million before applying deductions/reliefs.

AND

none of the following conditions apply:
- Gift with reservation of benefit
- Foreign assets exceeding £100k
- Several trsuts or one trust w/ value exceeding - £250k, unless passing to the spouse.
- Claim made for RNRB.

Question 60

What form is used to make corrections to IHT due?

Answer 60

C4 form

Question 61

When is IHT due?

Answer 61

Before a grant of representation may be issued, and by the latest at the end of the sixth month following the death.

Question 62

What payment method of IHT only concerns family homes?

Answer 62

option to pay inheritance tax in up to ten annual instalments, plus interest, on the anniversary of the first payment date.