4 - Inheritance Tax Flashcards
What is the current IHT nil rate band?
£325,000
What rate of IHT is paid on transfers of over the current NRB threshold, on or within 7 years of death?
40% over £325,000 (NRB)
A reduced rate of tax is applied on transfers of property or value over the current NRB threshold, in which circumstances and what is the rate?
A reduced rate of 36% applies to an estate where at least 10% of the net estate is left to a UK charity.
What rate of IHT is paid on ‘other chargeable lifetime transfers’, e.g. payments into discretionary and most other trusts, when over the current NRB threshold?
20% over £325,000
What happens to unused NRBs?
Can be transferred to the estate of a surviving spouse or civil partner
What is the current IHT RNRB?
£175,000
RNRB can only be set against the chargeable estates of those who died on or after which date?
6 April 2017
What must first be deducted before calculating the value of a property for IHT purposes?
Mortgages
If a property is valued at £150,000 for the sake of valuation to use RNRB, what RNRB would be available?
£150,000, you don’t get to use the full £175,000 if the property isn’t worth this
If a property is left to a discretionary trust, and the direct descendants are beneficiaries, does the RNRB apply? Explain.
Not usually because the trustees (not the beneficiaries) would then own the property.
However, if it’s passed in trust with an IPDI, and direct descendants have an interest in possession, then RNRB applies.
RNRB is also potentially available if property passes to a trust for a disabled person or a trust for a minor.
How does the cumulation principle for IHT work?
All chargeable transfers over a seven-year period are added together (accumulated) and tax is payable once the nil rate band is exceeded. A transfer drops out of the cumulation once it is more than seven years old.
If a UK-domiciled individual owns property abroad, is this liable to IHT?
Yes, property all over the world
If an individual is domiciled outs ode of the UK, which property is liable to IHT, UK or abroad?
UK only
Which factors need to be met for an individual to be deemed domiciled in the UK for IHT purposes?
Resident in UK for at least 15 of last 20 tax years (deemed apply from 16th year)
Born in UK with UK domicile of origin and return to UK (becoming resident) having obtained domicile of choice elsewhere (and have also been resident in UK in at least one out of two last tax years)
For IHT purposes, UK deemed domiciled status is lost when?
Once an individual has been nonresident for at least four consecutive tax years.
Is an individual’s UK bank account subject to IHT when they die if they were domiciled and resident elsewhere?
No, it is left out for IHT purposes
Are investmentsin government securities liable to IHT?
No
What is a chargeable transfer?
A transfer of value made which is not exempt
What is a transfer of value?
It is a reduction in the donor’s estate as a result of a transfer. i.e you are transferring value away from the estate.
When is an interest-free loan not a transfer of value?
If it is repayable on demand or on death
What are the 3 types of ‘transfer of value’?
Exempt transfers
Potentially exempt transfers (PETs)
Chargeable lifetime transfers (CLTs)
At what point are the 3 types of ‘transfers of value’ taxed and by how much?
Exempt transfers - never
Potentially exempt transfers (PETs) - become exempt if donor survives 7 years, so potentially never
Chargeable lifetime transfers (CLTs) - potentially immediately at 20% (25% if liability is met by the donor)
Pension death benefits are exempt or liable to IHT?
Exempt, but will form part of your survivors estate
The IHT annual exemption is applicable only to what type of gifts?
Lifetime gifts
What is the IHT annual exemption amount?
£3,000
Can the IHT annual exemption be carried over to the next tax year if not used?
Yes, for one tax year only
Whats the difference in definition of exemption and relief?
An exemption means that the transfer does not count as a chargeable transfer and is therefore neither taxed nor included in the cumulation for the future.
A relief reduces the value of a chargeable transfer. It does not remove the transfer from the tax regime but merely reduces its value
What is the small gifts exempt amount?
£250
Can the small gifts exempt amount be used in addition to the annual exemption if the lifetime gift is over £3,000?
No, you cannot use the exemptions together
How many times in a tax year can you use the small gifts exemption?
As often as you like, as long as you haven’t already used an exemption on the same person that tax year already
Does the small gifts exemption apply when gifting into trust?
No, must be an outright gift
List the 4 wedding/civil partnership gifts exemption amounts.
Donor is parent £5,000
Donor is remote ancestor (i.e grandparent) £2,500
Donor is party of the partnership (i.e spouse) £2,500
Donor is any other person £1,000
How long does the exemption last for gifts of educational purposes for children? Which children are inlcuded and excluded?
Until the tax year when the child becomes 18, or ends full-time education, whichever is the later.
Includes legitimate children, illegitimate, adopted and step-children, but excludes grandchildren and remoter relatives.
If a portion of the estate is left to a political party, which 2 conditions should be met for IHT to become exempt?
At the last general election preceding the transfer:
Two party members elected to the House of Commons; or
One party member elected with at least 150,000 votes being given to party candidates.
The estates of members of the armed forces are completely tax free in what circumstances?
On death if they die because of wounds received or diseases contracted on active service
The estates of members of the emergency services and humanitarian aid workers who die, are exempt from IHT in what circumstances?
A result of responding to emergency circumstances
A PET is a lifetime transfer by an individual to which 3 persons/bodies?
Another individual, BARE TRUST, disabled trust
Name the 3 consequences of making a PET.
No tax at the date of the gift
Gift does not have to be reported to HMRC
If donor survives for 7 years, the gift becomes fully exempt
What happens to a PET if the donor dies within 7 years?
Gift becomes chargeable
When a PET becomes chargeable, what date is it valued for tax purposes?
The date the PET was made, not the date at death
A donor dies one year after making a PET of a house worth £100,000 at the time of the gift, but £110,000 at death, what will be the valuation for IHT calculations?
£100,000
This is because PETs are charged at the value of the transfer, not the date of death
Payment of premiums into a life policy for the benefit of the intended donor.
Chargeable of exempt transfer? Why?
Exempt, because it’s ‘habitual’, UNLESS the donor has already purchased an associated annuity on their life.
What is the IHT liability on lifetime transfers for maintenance of children such as education?
Exempt
Do PETS have to be reported to HMRC?
No
Gifts into which 2 types of trust are PETs?
Bare trusts and disabled trust
What is the most common type of chargeable lifetime transfer?
Gift into a discretionary trust
When two individuals die simulatenously who died first
Older one
When should the claim for Unused nil rate band be used?
two years of the end of the month in which the death occurs; or
three months of beginning to act as personal representatives if that period ends later.
What are the 3 main reliefs available for IHT?
Business relief, agricultural relief and woodlands relief
How long does business property need to be owned for before business relief becomes available?
2 years
100% business relief is available for which type of businesses?
Unincorporated (such as partnerships and sole traders) and unquoted and AIM companies
If a sole trader dies and leaves the whole business to her son, what is the IHT position?
Not liable, but not exempt. Instead 100% business relief is used.
50% business relief is available for which type of businesses?
Controlling shareholdings in listed companies
Land, buildings, plant and machinery used mainly in connected with the company controlled by the donor”
Agricultural relief is available at 50% and 100%. When do each apply?
100% owner-occupied farms and farm tenancies
50% interests of landlords in let farmland”
When is quick succession relief available?
When the property in the deceased’s estate had passed to them by a chargeable transfer in the five years before the death, and therefore charged twice for IHT
What is a gift with reservation
Gifted but the donor still enjoys the benefit of it (i.e., donor gifts their house to their friend, but continues to live in it without paying full market rent OR donor gifts a painting but it remains on their own wall)
A gift is treated as a gift with a reservation of benefit if it is not enjoyed to the exclusion
or virtual exclusion of the donor.
HMRC has stated that where a gift is made into trust, the retention by the settlor of a reversionary interest under the trust is or isn’t a reservation of benefit?
reservation of benefit
Why is it important that a trustee is not able to benefit from a trustee charging clause, if they are also the donor of a discretionary trust?
Because it’s regarded then as a reservation of benefit
What is a reversionary interest?
An interest that reverts back to the settlor of a trust once a beneficiary’s interest has come to an end
How long does a gift with reservation stay in the donor’s estate?
As long as the donor retains a benefit in the property.
What is the anti-avoidance legislation charge in place to stop people avoiding the GWR rules?
POAT - pre-owned asset tax
How is POAT calculated?
On an annual cash benefit basis
What are the 3 types of assets caught by POAT?
Land (inc. living accommodation)
Chattels
Intangible assets where settlor retains an interest (life assurance for example)
How is the cash value benefit of chattels calculated for POAT?
A percentage of the capital value
Percentage being equal to the official interest rate for income tax purposes. For 2023/24, this is 2.25%.
What’s the minimum cash value of the annual benefit for POAT to potentially apply?
£5,000
What date is property valued for the purpose of the POAT charge?
Either:
– 6 April in the relevant tax year; or
– the date it becomes subject to the charge if that is later.
If the property is land or chattels, how often must it be revalued for POAT?
Every 5 years
POAT applies to assets where in the world for the following individuals:
1. UK-domiciled
2. Not UK-domiciled
3. Deemed domiciled or UK by choice
Worldwide assets
UK assets
does not apply to non-UK assets that they ceased to own before acquiring a UK domicile or deemed domicile.
How is POAT valued on a) assets and b) property?
Assets = its value
Property = market rental value
How can you avoid both POAT and IHT?
Elect to have the assets subject to IHT on death, using an IHT500 form
What is the normal deadline for election of an IHT500?
31 January after end of tax year in which income arises (i.e., tax arises 2023/24, then election due by 31 January 2025.
When gifts are made between ‘connected persons’, such as parents and their children or grandchildren, the donor is treated as having made the disposal at what value?
Full market value
When someone dies holding assets that stand at a gain, the assets are liable to IHT or CGT?
IHT - they benefit from a ‘tax-free uplift’ to the value which applied at the date of death, also known as ‘rebasing’
How are legal costs treated when valuing property for IHT?
If donor pays the cost, they are ignored, but if the recipient pays the cost, they reduce the value of the transfer
Where a chargeable transfer also results in a CGT liability, which is paid by the recipient, how is the reduction in value calculated?
IHT is reduced by the amount of CGT paid
How is relief given when a deceased’s estate includes listed shares or authorised unit trust holdings, which are sold within a year of the death at a lower value than the value at the date of death?
Relief is given by recalculating the tax on the basis of the actual sale value of all the sold shares
If the sale of land to unconnected persons within three, sometimes four, years of the death, makes a loss, a relief is available but only if the loss is how much?
Either £1,000 or 5% of the death value, whichever is the lowest
What is related property?
Related property is property that is either
a) in the estate of a spouse or;
b) settlement in which the donor or spouse or civil partner has an interest in possession
The tax payable when transfers are grossed up is, what, in excess over the nil rate band?
One-quarter of the excess
When is IHT due to be paid?
Usually due six months after the end of the month in which the death occurred
If you make a gift into trust and include yourself as a beneficiary, what type of gift is this?
Gift with reservation
Creation of a bare/absolute trust, is what type of transfer of value?
PET
What are the exit and periodic charges on a disabled trust?
There are none
In which circumstances can a settlor create a disabled trust with self-interest, and still escape IHT?
If they can show that their current condition will lead to disability in the future
In which type of trust does the beneficiary have a life ‘interest’ or life ‘rent’?
Interest in possession trust
What are the 3 key dates regarding the taxation of IIP trusts?
22 March 2006
22 March 2006 - 5 October 2008
5 October 2008
Broadly, what is meant by someone having an interest in possession?
The beneficiary is entitled to trust income from the asset as it’s produced, this is known as their “interest in possession”
In which 3 circumstances would a a transfer of value of the trust capital occurs for IHT purposes occur, where an interest in possession changes on a trust pre-22 March 2006?
Death of absolute beneficiary
Death of life tenant
Appointment under a flexible trust
A change to an interest in possession trust that was created before 22 March 2006, is deemed a PET if the change occurred when?
Before 6 October 2008, after this date they will treated as a CLT
If an interest in possession trust was created after 22 March 2006, what type of ‘transfer of value’ is this?
Chargeable lifetime transfer (CLT)
An interest in possession trust created after 22 March 2006, is liable to entry, exit and periodic charges, except in which 2 circumstances?
trusts for disabled or vulnerable persons; or
IPDI trusts created on death by will or intestacy.
The creation of a lifetime trust with an interest in possession is usually a CLT when the trust was established on or after, what date?
22 March 2006
When there is a life interest (an entitlement to income for life), who has the interest in possession?
Life tenant
What is an IPDI trust?
One where a person has an interest in possession in settled property and both of the following apply:
* the settlement was effected by will or under intestacy; and
* the beneficiary became beneficially entitled to the interest in possession on the death of the testator or intestate.
What is the IHT treatment on an IPDI trust?
No IHT on death of first spouse, and their NRB remains in tact
What is a “same day addition” when referring to trust planning?
A same day addition is where property is added to two or more relevant property trusts on the same day or the value of either is increased on the same day
When does the periodic tax charge occur on a discretionary trust?
On each tenth anniversary of the date of the creation of
the trust.
What is the periodic tax charge rate on a discretionary trust?
30% of the lifetime rate (currently 20%) that would have applied to a hypothetical transfer by the settlor.
This makes a maximum charge of 6% of the trust fund.
What is the maximum rate of tax during the life of a discretionary trust?
6%
i.e. 30% × 20%, every ten years.
If the trustees make a decision to accumulate income within a discretionary trust rather than distribute it, the relevant property will become chargeable to the IHT periodic charge, why is this?
Because the character of the “income” actually becomes “capital” instead
How are trusts for bereaved minors and 18 to 25 trusts created?
On the death of a parent by their will or intestacy or;
Under the Criminal Injuries Compensation Scheme.
At what age must an absolute interest be given with bereaved minors trusts and 18 to 25 trusts?
Bereaved minors = 18
18-25 = 25
With a trust for a bereaved minor, what are the periodic and exit charges?
There are no periodic charges or exit charges provided the income and capital of the trust go to the beneficiary
At what age must absolute interest be given in a trust for a bereaved minor?
18
When is the exit charge levied on an 18-25 trust?
When the absolute entitlement is given, based on the period since the beneficiary’s 18th birthday.
How will most trusts created on or after 22 March 2006 that create flexible interest in possessions be treated for IHT purposes?
As chargeable lifetime transfers (CLTs)
