3.1 Taxation - Inheritance Tax

Question 1

What is the cap for IHT (IHT 1984)?

Answer 1

Estate + lifetime gifts + transfers into trust funds

• Up to £325,000 => IHT (0%)
• Above £325,000 => IHT (40%)

Question 2

Who towards and when is IHT charged?

Answer 2

Charged on;

• Individuals (NOT companies)
• PRs

Payable 6 months after end of month of death

Question 3

What is included in the estate?

Answer 3

Included

• Property subject to reservation (value of asset at date of death)
• Property passing under T’s will/intestacy
• Jointly owned property
• Nominated property (T nominates specific person as beneficiary > Independent of intestacy/will)
• Lifetime gifts made conditional on death
• Interest in possession trusts (income in trust property)

NOT included

• Excluded property
• Life insurance proceeds
• Pension fund > Discretionary lump sum payments
• Husband + Wife die almost simultaneously (commorientes) > Presumption of instant death

Question 4

What is the value of the estate?

Answer 4

Open market value (immediately before death)

• Jointly owned (husband + wife) > If whole value exceeds separate value => 50% whole used
• Shares (quoted) > Lower of two values + 25% difference between two values
• Shares (unquoted) > Market value basis
• Land > Co-ownership > 10-15% discount (open market NOT likely)
• Land > Spousal co-ownership > NO 10-15% discount

LESS debts + expenses

• Debts + liabilities (bills)
• Encumbrances
• Reasonable funeral expenses > Apply allowance

Question 5

What are potentially exempt transfers?

Answer 5

Donor passes interest into Donee/Possession trust

Donor survives 7 years after transfer

=> Exempt from IHT liability

Question 6

What exemptions exist?

Answer 6

Annual exemption
- £3,000 (unused balance > carry forward > next tax year)

Small gift exemption
- Max. £250

Normal expenditure from income
- Lifetime transfer (transferor’s regular expenditure/income/sufficient income left to support normal lifestyle)

Gifts in consideration of marriage/civil partnership (before wedding day)

• Parents give £5,000
• Remoter relations (grandparents, great grandparents) > £2,500
• Non-relations give £1,000

Other gifts

• Charities
• Major political parties
• Public benefit

Spouse exemption

• Transfer at death (survivorship/will/intestacy)
• Lifetime transfer

Trust property > Spouse
- T > Trustee > Income to T’s wife (life interest)

Residence (nil rate band)

• T died w PRs
• T gave main residence > £325,000 => Descendants (children, spouse/civil partner, NOT siblings/next of kin)
• Additional nil rate band (£150,000) (2019-20)
• Additional nil rate band (£175,000) (2020-21)

Question 7

What is taper relief?

Answer 7

Transfer made 0-3 years before T’s death => NO relief

Transfer made 3-4 years before T’s death => 20% relief

Transfer made 4-5 years before T’s death => 40% relief

Transfer made 5-6 years before T’s death => 60% relief

Transfer made 6-7 years before T’s death => 80% relief

Transfer made +7 years before T’s death => 100% relief

Question 8

What is quick successive relief?

Answer 8

T transfers asset to TP > TP transfers asset to TP2
- TP’s estate increases value => IHT payable = [(TP’s gross estate LESS IHT paid (TP’s estate))/TP’s gross estate] x IHT paid (TP’s estate)

Transfer made 0-1 year before TP2’s death
- 100% IHT (TP2’s estate)

Transfer made 1-2 years before TP2’s death
- 100% IHT (TP2’s estate) LESS 80% IHT payable

Transfer made 2-3 years before TP2’s death
- 100% IHT (TP2’s estate) LESS 60% IHT payable

Transfer made 3-4 years before TP2’s death
- 100% IHT (TP2’s estate) LESS 40% IHT payable

Transfer made 4-5 years before TP2’s death
- 100% IHT (TP2’s estate) LESS 20% IHT payable

Question 9

What is required for disclaimer relief?

Answer 9

1) Ben dies within 7 years of disclaimer
2) Writing (within 2 years of Ben’s death)
3) NO consideration

=> NO IHT
- Treated as if T left property to entitled person

Question 10

What is required for variation relief?

Answer 10

1) Ben dies within 7 years of disclaimer
2) Writing (within 2 years of Ben’s death)
3) NO consideration

4) Ben > Written notice (within 6 months of variation) > HMRC
- UNLESS stated in variation deed

=> NO IHT
- Treated as if T left property to entitled person

Question 11

When do anti-avoidance provisions apply?

Answer 11

T > Ben > TP
- AAP applies to prevent Ben transferring to TP to avoid IHT

Settlor > Trustee > Ben
- Settlor retains equitable interest (settlement) > AAP applies

T > Gift > Spouse/Civil partner
- NO right to income on gift > AAP applies