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FLK 2 - Wills & Administration > 3. Inheritance Tax > Flashcards

3. Inheritance Tax Flashcards

1
Q

What is aim of Inheritance Tax?

A

IHT imposes a tax liability on estates at the time of death of an individual and certain transfers made during their lifetime.

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2
Q

What are the three main occasions when IHT may be charged?

A
  1. Death
  2. Lifetime gift to individuals within 7 years prior to death (PETs).
  3. Lifetime gifts to a company or into a trust (LCTs).
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3
Q

What is the aim of IHT on death?

A

charged on the value of an individuals estate, less their liabilities, and subject to exemptions and reliefs.

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4
Q

What is the charge to IHT on lifetime transfers to individuals?

A

Charged on certain lifetime gifts or transfers if donor dies within 7 years of making them.

Gifts to individuals are ‘potentially exempt transfers’ , because at the time

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5
Q

What are gifts to individuals called and why?

A

Gifts to individuals are ‘potentially exempt transfers’ PETs

Because at the time of transfer no IHT is chargeable - if it survives for 7 years it is exempt. If not, and transferor dies within period, it is chargeable.

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6
Q

What is the charge of lifetime transfers to company or trust?

A

Immediately chargeable to IHT when made.

Unless, the trust is for a disabled person.

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7
Q

How is IHT charged?

A

on the value transferred by a chargeable transfer

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8
Q

What does the term ‘chargeable transfer’ mean?

A

a transfer of value which is made by an individual but is not an exempt transfer.

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9
Q

What are the general 4 steps to calculate IHT ?

A

Step 1: Identify the transfer of value
Step 2: Find the value transferred
Step 3: Apply exemptions and reliefs
Step 4: Calculate tax at the appropriate rate

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10
Q

What is transfer of value on death and LT?

IHT Step 1: Identify the transfer of value

A

LT: Any disposition which reduced the value of the transferors’ estate.
Death: charged as if the deceased had made a transfer of value of their estate - deemed transfer value

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11
Q

What is the value transferred on death and LT?

IHT Step 2: Find the value transferred

A

LT: the amount of the reduction in the transferor’s estate
Death: value of the estate (markert value less debts and expenses)

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12
Q

What are the relevant exemptions and reliefs on death?

IHT Step 3: Apply exemptions and reliefs

A

Exempt Beneficiaries: spouses + charities.
Exempt Assets: BPR + APR.

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13
Q

What are the relevant exemptions and reliefs on lifetime transfers?

IHT Step 3: Apply exemptions and reliefs

A

Uncapped Exemptions: spouse + charity + family/life maintenance.
Capped Exemptions: annual + marriage + small gifts.
* Annual: £3k per tax year + £3k if unused from previous year (max £6k at once, use exemption of current year first and then prev year exemption).
* Marriage: per marriage per donor at £5k if parent; £2.5k if GP; £1k if other.
* *Small Gifts: *£250 per year per person (PETs only)

Exempt Assets: BPR + APR.

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14
Q

What is the rule on carrying forward unused annual exemption allowance?

A

The current year’s exemption must be used before the previous year’s exemption can be carried forward.

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15
Q

How does the annual exemption work for multiple transfers in a tax year?

A

Annual exemption is applied to reduce the value of the first transfer.

Any remaining unused exemption is then applied to subsequent transfers until it is fully utilized.

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16
Q

Whar the two main reliefs that apply to both LT and death?

A

Business Property Relief: owned >2yrs + at least 5% shareholding + employee.

Agricultural Property Relief: agricultural purposes + occupier owned >2yrs / 7yrs if occupied by 3P.

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17
Q

What are the elements of BPR?

A

owned >2yrs + at least 5% shareholding + employee.

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18
Q

What are the two possible % reductions of value transferred for BPR?

A

100% - attributable to certain defined types of relevant business property (no charge to IHT) e.g. business/interest + shares in private company

50% - attributable to any other relevant business property - e.g., shares in public company with voting control + plant/machinery/land owned personally but used for business which indivdiaul is a memer with voting control.

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19
Q

What does voting control mean?

A

the ability to exercise over 50% of the votes on all resolutions

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20
Q

What are the time limits for BPR?

A

assets in question must have been owned by the
transferor for at least two years at the time of the transfer OR , broadly, must be a replacement for relevant business property where the combined period of ownership is two years.

DONT FORGET HAS TO BE A TRADING COMPANY NOT INVESTMENT OR PROPERTY HOLDER

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21
Q

What are the elements of APR?

A

agricultural purposes + occupier owned >2yrs / 7yrs if occupied by 3P for agricultural purposes

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22
Q

What is the effect of APR?

A
  • to reduce the agricultural value of agricultural property by a certain percentage.

The ‘agricultural value’ is the value of the property if it were subject to a perpetual covenant prohibiting its use other
than for agriculture.

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23
Q

What happens if part of the property value is over the agricultural value?

APR

A

that part will not qualify for any agricultural property relief but may qualify for business property relief if the relevant requirements are satisfied.

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24
Q

What are the two possible % reductions of value transferred for APR?

A

100% - the transferor had the right to vacant
possession immediately before the transfer (not rented out) OR where the property was subject to a letting commencing on or after 1 September 1995.

A reduction of 50% is allowed in other cases.

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25
Q

What are the two bands for IHT tax rates?

IHT Step 4: Calculate tax at the appropriate rate

A
  1. Nil Rate Band - £325,000
  2. Residence NRB - £175,000
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26
Q

When is the NRB available and how is tax charged?

A
  • available for all transfers of value
  • tax is charged at 0% on the first £325k
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27
Q

When is the RNRB available and how is tax charged?

A
  • for deaths after 6 april 2017 in addition to NRB
  • available only on transfers on death where there is a ‘qualifying residential interest’ + ‘closely inherited’.
  • tax is charged at 0% on the first £175k
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28
Q

What is a ‘qualifying residential interest’?

RNRB

A

an interest in a dwelling house + at any time
been the deceased’s residence + forms part of the deceased’s estate.

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29
Q

Who must a property pass to, to be ‘closely inherited’?

A
  • lineal descendant of the deceased outright or on certain types of trust. Like children, step-children, foster, adopted and deceased appointed as their guardian.
  • current spouse or civil partner of the deceased’s lineal descendants
  • widow, widower or surviving civil partner of a lineal descendant who predeceased the deceased (as long as not remarried before deceased’s death)
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30
Q

How is RNRB affected when estate value exceeds £2 million?

A

RNRB is reduced by £1 for every £2 over
the £2 million threshold.

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31
Q

Formula to calculate adjusted RNRB for estate over £2 million

A
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32
Q

What is the effect of not using all of NRB/RNRB available?

A

Any unused NRB/RNRB may be claimed by a surviving spouse, even if the first spouse died before 6 April 2017.

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33
Q

What is the downsizing allowance and how does it affect inheritance tax?

A

downsizing allowance allows RNRB claims by personal representatives if the deceased downsized or sold property after July 8, 2015, as long as the property qualifies for RNRB and equivalent assets go to lineal descendants.

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34
Q

What is the tax charged on balance of transfer exceeding NRB?

A

Death: 40% (smaller cases 36%)

LCTs: 20%

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35
Q

What is the effect of giving 10% of the chargeable estate value to charity?

A

if an individual gives 10% of CE to charity they will be taxed at 36% rather than 40%.

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36
Q

How can the NRB be increased for surviving spouses?

A

If the deceased died on or after 9 October 2007 having survived a spouse or civil partner, the NRB in force at the date of death of the survivor is increased by whatever percentage of the NRB of the first to die was unused by them (subject to a maximum increase of 100%).

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37
Q

What is the process of cumulation?

A
  • Solely used for NRB.
  • Calculating how much of the NRB has been ‘used up’ by looking at all chargeablt transfer duringthe previous 7 years to death.

Examples:
1. no CT, NRB is fully available
2. 1 CT of £75k, NRB available is £325k less £75k = £250k

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38
Q

How do cumulation periods work for multiple transfers?

A

Each transfer has its own cumulation period, and when a new transfer is made, the cumulative total must be recalculated.

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39
Q

What is the availability of RNRB?

A
  • not avavaible for life time transfers
  • available in full on death, subject to any adjustments in relation to estates over £2 million.
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40
Q

What is included in the definition of estate?

transfers on death

A
  • property under will/intestacy
  • property with beneficial entitlement but not under will/intestacy
  • property included because of special statutory provisions
41
Q

What are the two types of property which can be included in the estate by statute?

transfers on death

A
  1. ‘Certain trust property’
  2. property given away by the deceased during lifetime but which is ‘subject to reservation’ at the time of death
42
Q

How is trust property included in the estate for IHT and what is it known as?

transfers on death

A

where a beneficiary who is entitled to all the income from a trust dies, the trust fund is taxed as if it were part of the beneficiary’s estate.

known as ‘qualifying interest in possession’

43
Q

What is an immediate post-death interest?

trasnfers on death (trust property)

A

IPDI is a qualifying interest in possession arising on the death of the settlor under their will or intestacy.

44
Q

What is the aim of ‘property subject to reservation’?

transfers on death

A

designed to prevent people avoiding tax by parting with ownership of property but continuing to enjoy the benefit.

45
Q

When does the rule of ‘property subject to reservation’ apply?

transfers on death

A

where the deceased gave away property during their lifetime but:
* did not transfer ‘possession and enjoyment’ of the property to the donee OR
* was not entirely excluded from enjoying the property

46
Q

What is the effect of the ‘property subject to reservation’ rule?

transfers on death

A

If property is subject to a reservation at the time of the donor’s death, the donor is treated as being ‘beneficially entitled’ to the property.

47
Q

What property is not part of the estate for IHT purposes?

transfers on death

A
  • property in which the deceased did not have or deemed to have a beneficially interest in immediately before death.
48
Q

What are examples of non-taxable estate?

A

life policies written in trust + discretionary pension + remainder interest + discretionary trust assets.

49
Q

What is the basic valuation principle?

IHT Step 2: find the value trasnferred

A

the value immediately before death of every asset forming part of the estate must be assessed and reported to HMRC.

50
Q

What discounts can apply to the value of a share of jointly owned land (non-spouses) to ease difficuly in selling share?

A

10% for commercial property and 15% for residential property

51
Q

What is the modification of the basic valuation principle?

A

where the death causes the value of an asset in the
estate to increase or decrease, that change in value should be taken into account

52
Q

What is the rule of valuing quoted shares?

A
  • Take one-quarter of the difference between the lower and higher price and add it to the lower price.

Example: if at the date of death, the quoted price per share is 102p/106p, the value of each share for IHT is 103p.

53
Q

Are debts and expenses deductible for IHT?

A

Yes, provided that they were incurred for money or money’s worth.

Examples: funeral expenses, bills, and outstanding income tax.

54
Q

What is the limitation to the full spouse exemption and its solution?

A
  • Limitation: If the transferor is domiciled in the UK but the transferee is not, the level of the exemption is limited to £325,000.
  • Solution: the transferee can elect to be treated as UK-domiciled for IHT purposes and so receive the full exemption.
55
Q

What is the order of application of exemptions and reliefs?

A
  • Spouse or civil partner and charity exemptions are applied before reliefs
  • ‘Lifetime only’ exemptions: apply reliefs before exemptions since they can reduce the value of only part of a transfer.
56
Q

What is the main example of an LCT?

A

lifetime chargeable transfer made on or after 22 March 2006 into any trust (other than a disabled trust) OR to a discretionary trust or company (whether made before, on or after 22 March 2006)

57
Q

What is potentially exempt status in inheritance tax?

A

It means the transfer becomes exempt if the transferor survives seven years; otherwise, it becomes chargeable upon their death, with no immediate action needed at the time of the transfer.

58
Q

What exemption is not available to LCTs?

A

small gifts exemption

59
Q

What are PETs?

A

Potentially exempt transfers - gifts to individuals.

60
Q

What IHT is payable on LCTs?

A
  • 0% on first £325K - NRB
  • 20% on balance
  • 40% if re-charged.
61
Q

What is the effect of death on PETs?

A

PET fails and will become chargeable @40% only if the transferor dies within seven years of making the transfer.

62
Q

What is the effect of a taper relief on a failed PET?

A
  • reduces any tax payable on the PET
  • available if the transferor survives for MORE than three years after the transfer
63
Q

How does taper relief reduce the tax payable PETs?

A

Taper relief reduces the tax on PETs based on the time elapsed before the transferor’s death.

  • Transfers within three to four years before death are subject to 80% of the full death charge
  • four to five years to 60%,
  • five to six years to 40%
  • and six to seven years to 20% of the death charge.

reduces IHT due by 20% if death 3-4yrs ago + add 20% every 1yr after.

64
Q

What is the effect of death on LCTs?

A

If a transferor dies within seven years of making LCT, the IHT payable by trustees may increase due to application of the full death rate of IHT and potential chargeable PETs, which reduce the available NRB for the LCT.

65
Q

How does the cumulation period work for chargeable or rechargeable transfers?

A

Each chargeable or rechargeable transfer has its own cumulation period.

This means that a taxpayer who makes a LCT may need to survive for up to 14 years before it no longer impacts their inheritance tax liabilities.

66
Q

What is the effect of a taper relief on a failed LCT?

A

As long as IHT on the LCT has been recalculated + more than three years have elapsed between the transfer and the subsequent death, tapering relief applies to reduce the recalculated tax.

67
Q

What is credit for IHT already paid for failed LCTs?

A

Credit given for any IHT paid on the LCT at the time it was made.

But, if the recalculated bill is lower than the original amount paid
(which may occur if tapering relief is available) no tax is refunded.

68
Q

What is the meaning of liability and burden?

A

Liability: HMRC collects the tax from representatives and trustees. Those who receive the property share the liability but often receive it after the tax has been paid.

Burden: The burden of tax can be altered by the testator in the will, but the statutory rules on liability are fixed and cannot be changed

69
Q

What is the estate rate?

A

The average rate of tax applicable to each item of property
in the estate - usually 40%

70
Q

How is tax typically allocated among assets in an estate?

A
  • distributed proportionally based on the value of the assets
  • done by calculating the estate rate

Alternatively
* the tax on a specific property can be determined by applying the proportion of the total tax bill to the total chargeable estate.

71
Q

Who is liable for IHT on death?

A
  • PRs: tax on non-settled estate
  • Trustees: tax on settled estate
72
Q

Who is liable for IHT of failed lifetime transfers?

A
  • transferor if alive + transferee if deceased
  • tranferor pays more as loss is increased by amount paid (better for trustees to pay IHT rather than transferee).
73
Q

Who is initially responsible for paying tax on a gift, and when does this responsibility shift?

A
  • The recipient of the gift is initially responsible for paying the tax on the property.
  • If the tax remains unpaid 12 months after the end of the month of death, PRs become liable for the tax.
74
Q

Who does the burdren of IHT tax fall on?

A
  • transferor decides
  • if will is silent - IHT on property to PRs is treated as a testamentary expense, while IHT on property held as beneficial joint tenants is the responsibility of the surviving joint tenant.
75
Q

IHT payment timeframes for death estates?

A
  • IHT due six months after the month of death.
  • An instalment option available (land+business/interest+shares w/ control + unquotes hares w/o control)
  • Interest on late payments.
  • Sale - all outstanding tax and interest becomes payable.
76
Q

What are the elements of unqouted shares with no control, to qualify for instalment option?

IHT payment timeframes

A
  1. They represent at least 10% of the company’s shares and are worth over £20,000.
  2. Paying the tax in one sum would cause undue hardship according to HMRC.
  3. The IHT on these shares, combined with other instalment option property, makes up at least 20% of the total IHT on the estate.
77
Q

IHT payment timeframes for PETs?

A
  • IHT due six months after the month of death.
  • Instalment option may apply.
78
Q

IHT payment timeframes for LCTs?

A
  • IHT due on LCTs made after April 5th but before October 1st is payable on April 30th of the following year.
  • IHT on LCTs made outside of these dates is due six months after the month in which the LCT is made.
  • If the transferor dies within seven years, additional IHT is due six months after the month of death.
  • Instalment option may be available.
79
Q

What are the two key anti-avoidance measures for IHT?

A
  1. Disclosure of Tax Avoidance Schemes (DOTAS)
  2. General Anti-Avoidance Rule (GAAR)
80
Q

What is Disclosure of Tax Avoidance Schemes (DOTAS)?

A

DOTAS is a regulation that mandates the early disclosure of certain tax avoidance schemes to HMRC.

81
Q

Why is early disclosure required under DOTAS?

A

Early disclosure allows HMRC to assess the scheme’s effectiveness and take countermeasures to prevent tax avoidance.

82
Q

What qualifies as a ‘notifiable arrangement’ under DOTAS?

A

A ‘notifiable arrangement’ must have its primary purpose aimed at gaining specific Inheritance Tax (IHT)-related advantages. It should also involve contrived (deliberate) or abnormal steps necessary for obtaining a tax advantage.

83
Q

What is the General Anti-Avoidance Rule (GAAR)?

A

GAAR is a rule that applies to Inheritance Tax (IHT) and allows HMRC to address abusive tax arrangements.

84
Q

When does an arrangement qualify as a ‘tax arrangement’ under GAAR?

A

An arrangement qualifies as a ‘tax arrangement’ under GAAR if it is reasonable to conclude that obtaining a tax advantage was a primary purpose.

85
Q

What makes an arrangement ‘abusive’ under GAAR?

A

An arrangement is considered ‘abusive’ if it cannot reasonably be seen as a reasonable course of action, subject to a double reasonableness test, with the burden of proof on HMRC.

86
Q

What actions can HMRC take if a taxpayer claims a tax advantage under a scheme that violates GAAR?

A

HMRC can counteract the tax advantage and potentially impose penalties on the taxpayer.

87
Q

What is the difference between gross IHT estate and net IHT estate?

A

Gross: is the the value of all transfers on death
Net: is the Gross LESS debts and funeral expenses

88
Q

What is the rule of trading for BPR?

A

Company must be a trading company not an investment company.

89
Q

For BPR how can you identify between quotes and unquoted shares?

A

unquoted - Ltd (private company)
quoted - Plc (public company)

90
Q

When is taper relief available?

A

3 years and above from death

91
Q

What is the chargeable estate?

A

The taxable value of the estate once all exemptions and reliefs have been applied.

92
Q

When is the tapering relief calculation applied?

A

Applied to the total value of IHT payable for each separate transfer of value.

93
Q

What is the process of calculating the rechargeable amount of LCT after death?

A

value transferred + exemptions and relief + NRB applicable + tax payable + possible taper THEN deduct original amount paid (when it was first charged).

94
Q

What is IHT % on amount exceeding the NRB for transfers of value (£325k)? Are there any exceptions (T HIS ASSUMES DECEASED MADE NO TRANSFER OF VALUE 7 years before their death)

A

Transfers of value amounts that exceed £325k are subject to a 40% tax rate. However, 36% applies if at least 10% of the net estate goes to charity.

95
Q

Normal expense out of income. When is it an exception?

A

Transferors normal expenditure

Made out of transferors income

After such payments transferor left with sufficient income for usual standard or living
Example: parent regularly giving child payment to help with uni living expenses

96
Q

Charity exemption:

A

Applies to charities obviously but also this similar exception applies to national bodies and bodies providing public benefit such as museums, art galleries and political parties.

97
Q

Charity exemption:

A

Applies to charities obviously but also this similar exception applies to national bodies and bodies providing public benefit such as museums, art galleries and political parties.

98
Q

Further condition for agriculture relief

A
  1. Transferor must have owner the agricultural land for two years prior to transfer
  2. Land owned by transferor for seven years prior to transfer and was occupied by someone throughout for the purpose of agriculture

FLK 2 - Wills & Administration (6 decks)

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