4 - IHT Flashcards
Exempt transfers:
- transfers to spouse
- annual exemption
- small gifts
- gifts considering marriage
- gifts for education and marriage
- gift for charity and political parties
- gift for national benefit
- gift out of normal expenditure
- transfers to spouse - providing legally married/ civil partner
- annual exemption - transfers upto £3k per tax yr and can carry forward 1yr (so £6k max)
- small gifts - max. £250 per recipient
- gifts considering marriage - £5k max from parent, £2.5k from grandparent, £1k from anyone else max.
- gifts for education and marriage - unlimited upto age 18
- gift for charity and political parties - unlimited
- gift for national benefit - unlimited
- gift out of normal expenditure - gifts made regularly that do not effect standard of living are exempt
Can you transfer nil rate band to spouse?
Yes
PET for IHT
If the donor survives 7+yrs then transfer becomes exempt
If a donor does within 7yrs of PET, what point in time of the asset life is used to add to value of their estate for IHT purposes?
Frozen at value of time the gift was originally made
What trusts are a PET?
Bare and disabled trusts
(A disabled bear is your PET)
Chargeable lifetime transfer for IHT
Brings an immediate IHT charge which reduced NRB
If donor survives 7+yes no further IHT charge made but if for within 7yrs then charges at IHT taper relief
Can be paid by donor or donee
What can be deducted from estate upon death?
Funeral expenses and any debts
What property is excluded from IHT?
Property outside of UK if person was non-UK domicile
Unit trust or OEIC if was non-UK domicile
Revisionary interest in trusts
Ineffective transfer and how to avoid it
Causing extra taxation e.g. parent gifts house to son, son allows parent to live in property rent free so is a gift with reservation, value of house is added back to deceased estate for IHT
Would be deemed a PET for 7yrs but can charge regular rent to avoid this
For IHT purposes, what if 2 peices of art together are worth £50k but separate they’re worth £5k but split them and gift one away?
Estate has lost £45k
Tax rates for IHT
0% for NRB
20% for chargeable lifetime transfers
36% death transfers if charity donation conditions are met
40% all other death transfers
Residence nil rate band
Must be on death but, additional £175k on top of NRB for:
- property had been their residence
- left to one or more direct descendants on death
- will always be limited to the lower of value of home or residential nil rate band of £175k
When does residential nil rate band start to reduce?
At £2m, start to lose £1 for every £2
Can you pass unused residential nil rate band to spouse? And how is this passed on?
Yes, but pass on percentage of unissued band not the amount
Is it possible to transfer the NRB more than once for spouse and remarriage to other spouse?
Yes, if Adam and Barbara are married if Adam dies and does not use any of the NRB then can pass this to Barbara. If Barbara remarries to Callum and then dies but only uses her own NRB of £325k, she then transfers % of Adam’s NRB to Callum
What is NRB limit?
2x NRB so £650k (£325k x 2)
What is the restriction of RNRB?
Limited to direct descendants only
What is the time limit of claiming unused NRB?
Must be claimed and is not automatic
- should be made within 2yrs of the end of month in which death occurs
- 3 months of beginning to act as personal representatives
Can you transfer % of unused RNRB?
Yes, even when did not previously exist for client
In what order is IHT calculated?
Within the 7yr assessment period, oldest transactions are assessed first and this is then assessed in chronological order
What is lifetime tax? And when is it due?
50% of the death rate which is currently half of 40% which is 20%
Due 6 months after end of month of transfer
Who pays IHT on lifetime transfer?
Either:
- Trustee pays out of trust fund so decreases the transferable amount
Or
- donors estate is reduced by IHT liability
Lifetime IHT is usually on what kind of trusts?
Discretionary and interest in possession trusts
When is a reduced death rate for IHT charged? And what is the reduced rate?
When atleast 10% of net estate is left to charity then get a reduced tax rate of 36%.
Net estate is gross estate minus exempt transfers, NRB and reliefs
What are components of an estate for IHT?
Number of chargeable elements within an estate
PET IHT if property has fallen in value if recipient still owns or has sold property before death
If recipient still owns the property is based upon date of donors death
If recipient sold the property before date of donors death at arms length then based on market value
Quick succession relief aim and time frame
Aims to stop something suffering IHT twice within short period e.g. if someone gifts something to Ben upon death suffering IHT then and after receiving Ben dies
HMRC consider quick succession as 5yrs from date of original death
How to calculate quick succession relief
(Net transfer / gross transfer) x tax paid on first transfer x rebel ant taper relief
Business relief criteria to avoid IHT
Business property must have been owned for 2yrs
Available on lifetime and death transfers and available immediately
2 types of business relief
100% relief:
- for unincorporated business
- shareholding’s in AIM and quoted companies
50% relief:
- controlling shareholdings in full listed companies
- land, building, plants, machinery isomer in company or partnership
How is business relief calculated?
Because they’re not exempt they are added to cumulative then given relief so can be tapered down if assets are over £2m
What isn’t eligible for business relief?
Businesses that aren’t typical trading companies and mainly deal with trading stocks, land, etc.
If business i subject to a binding contract of sale
Disregarded assets - assets not used in last 2yrs or not required for future use at time of transfer
Agricultural relief requirements to avoid IHT
must have been occupied by transferor for agricultural purposes for 2yrs
OR
Must have been owned by the transferor for 7yrs and occupied by someone else for agricultural purposes for that time
Types of agricultural relief
100% relief:
- owner occupied farms
- farm tenancies
Or
50% relief:
- interest in landlords in let farmland (increased to 100% for land let under tenancies that exceed 12 months and started after 31/8/95)
Woodland relief
Relief for those growing timber and is given on timber not the land (land may qualify for agricultural relief)
Woodland relief defers IHT until disposal of timber
Pre-Owned asset tax
Income tax on benefit that individuals get from free or low cost enjoyment or use of assets previously owned or provided funds to buy
What is the purpose of Pre-Owned asset tax?
To stop tax avoidance
Pre owned asset classes 3 rules for tax
- Income tax but value must exceed £5k
- types are land where value is based on rental value, chattels & intangible assets where both values are based on % of cash value
- assets are revalued every 5yrs
Limit on IHT for inter spouse transfer for dead person who is UK dom. and resi. but recipient is UK resi. but not UK dom. then each have a £325k allowance so total of £650k allowance.
UK dom. - No limit
Non-UK dom. - limit of £325k and with NRB takes it to £650k without IHT
