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R03 August 2020 > 4 - Inheritance Tax > Flashcards

4 - Inheritance Tax Flashcards

1
Q

What are the current IHT rates for 20/21?

A

Up to £325,000 - nil

Over £325,000 - 40%

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2
Q

How does the reduced rate of 36% apply?

A

If at least 10% of the estate is left to charity

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3
Q

What is the rate for chargeable transfers - i.e. into discretionary trusts and most other trusts?

A

20% (over £325,000)

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4
Q

Can the unused portion of the nil rate band be used by a surviving spouse?

A

Yes

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5
Q

What is the Residence nil rate band for 20/21?

A

£175,000 (on or after 6th April 2017)

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6
Q

Can the RNRB be used by other than the spouse?

A

Yes, by direct descendants such as children

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7
Q

If a person downsized or sold their home can they still claim RNRB?

A

Yes, the allowance is protected provided assets of an equivalent value are passed to direct descendants

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8
Q

What is the impact of RNRB for properties worth over £2Million?

A

Relief is tapered at the rate of £1 for every £2 over the threshold

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9
Q

Is RNRB available if a property is left to a discretionary trust?

A

No, as the trustees become the legal owner

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10
Q

In what type of trust would RNRB be available?

A

If the property passes to a trust with an immediate post-death interest (IPDI)

If the property passes to a trust for a disabled person or a minor

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11
Q

What is the cumulation principle?

A

All chargeable transfers over a seven year period are added together, tax is payable once the nil rate band is exhausted

A transfer drops out once it is seven years past

A dropped transfer may still be relevant when establishing IHT payable when:
A PET is made within 7 years and becomes chargable
There is additional IHT to pay on a CLT made withi 7 years

When death occurs, the value of the estate left is added to the total of CLT’s in the previous 7 years to calculate the tax due

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12
Q

When would a person be deemed domiciled for UK IHT purposes?

A

They are resident in the UK for 15 of the last 20 years
They are born in the UK with a UK domicile of origin and return to the UK, having obtained a domicile of choice elsewhere and have been resident in the U at least one out of the last 2 previous tax years

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13
Q

When would deemed domicile be lost for IHT purposes?

A

If an individual has been non-resident for at least four consecutive tax years

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14
Q

What is the definition of an exemption for IHT purposes?

A

The transfer does not count as a chargeable transfer and is therefore neither taxed nor included in cumulation for future

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15
Q

What is the definition of relief for IHT purposes?

A

It reduced the value of a chargeable transfer. It does not remove the transfer from the tax regime but merely reduces its value

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16
Q

For an transfer between spouses to be exempt, do the parties need to be married?

A

Yes, via marriage or civil partnership, common law does not apply

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17
Q

Would there be an IHT liability if a transfer took place between husband and wife after they seperated?

A

No, as long as it took place before the decree absolute.

Afterwards, it may still be possible to argue there was no gratuitous intent

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18
Q

If a spouse is domiciled overseas, can they use the exemption?

A

Yes, subject to a limit of £325,000

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19
Q

What is the current IHT annual exemption amount per tax year for lifetime gifts?

A

£3,000, can be carried forward by one year

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20
Q

How much can a person give as a small gift per year?

A

£250

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21
Q

When can a lifetime transfer be exempt from IHT under normal expenditure?

A

It was made as part of the transferors normal expenditure
It was made out of income
After allowing for all transfers, the transferor was left with sufficient income to maintain their usual standard of living

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22
Q

Could an exemption under normal expenditure be used to purchase an annuity on their life?

A

No, as the capital content is not treated as income of the transferor

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23
Q

What types of other gifts are exempt?

A 
Wedding
Education
Maintenance
Charities
Political Parties
National Benefit
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24
Q

What are the limits on wedding/civil partner gifts?

A

Parent - £5,000
Remoter ancestor (grandparent) - £2,500
Any other person - £1,000

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25
Q

What is the age limit for education gifts?

A

18 or ends full time education

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26
Q

If a member of the armed forces dies during active service, is their estate exempt?

A

Yes

Includes other emergency services & humanitarian aid workers if they die as a result of a response to an emergency situation

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27
Q

What are the qualifying donee’s of a PET?

A

Another individual
A bare trust
A disabled trust

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28
Q

If a PET becomes chargeable, at what point would the value of the PET be taken?

A

On purchase

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29
Q

If a PET becomes chargeable, what date is taken to calculate tax - 7 years before death or 7 years before the date of the transfer?

A

7 years before the date of the gift

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30
Q

What are the rates of taper relief for IHT?

A

more than three, under 4 - 20%
more than four, under 5 - 40%
more than five, under 6 - 60%
More than six, under 7 - 80%

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31
Q

What is the reason that a gift into a Bare Trust is a PET?

A

Because it is for the benefit of one individual only, it is considered to be a gift

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32
Q

If a PET was made where the value of the property has fallen since the date of the gift - what relief is available?

A

If the donee still owns the property - the value will be taken at the date of death

If the donee has sold, it will be the market value on the sale date

This does not apply to a movable wasting asset (useful life of less than 50 years)

33
Q

What is the most common CLT?

A

Lifetime gifts into trusts

34
Q

What tax is paid at the outset of a CLT?

A

20%

35
Q

If the donor of a CLT dies within 7 years, what are the consequences?

A

The death rates will apply retrospectively

36
Q

If taper relief on a CLT exceeds the tax paid at the outset, can a refund be claimed?

A

No

37
Q

If funds are borrowed against an asset to acquire assets that would qualify for business relief, how are they treated at death?

A

The amount of borrowing is deducted before business relief is given, to avoid borrowing against assets to avoid IHT in other higher charged areas

38
Q

What are the different types of excluded property in valuing a person’s estate?

A

Pension funds
Property outside the UK where the owner is not domiciled in the UK
Reversionary interests in trusts (the right to capital when the current beneficiary’s right to income has come to an end)
Holdings in UT’s and OIEC’s where the benefical owner is not domiciled in the UK

39
Q

What is the time limit on quick succession relief?

A

five years

40
Q

What are the rates for quick succession relief?

A 
less than a year 100%
1-2 years 80%
2-3 years 60%
3-4 years 40%
4-5 years 20%
41
Q

What is the calculation for quick succession relief?

A

Tax paid on first transfer x net transfer/gross transfer x relevant %

42
Q

If two adults die simultaneously, how is it treated for tax purposes, if general law states the older died first?

A

They are treated as having died in the same instant

43
Q

How would a provision in a will ensure there is no tax charge if a beneficiary dies within six months of a testator?

A

Include a clause in the will making the gift effective only if the beneficiary survives for a set period

44
Q

By when should personal representatives claim unused nil rate band on second death?

A

within two years of the end of the month in which death occurs or within three months of starting to act as a personal representative

45
Q

What is the purpose of disregarding certain assets from business relief, such as an asset that has not been used for 2 years or not required for future use?

A

To stop relief being claimed on large amounts of cash or investments that are not genuine assets for business use

46
Q

If a sole trader leaves her business to her son, what business relief would he be entitled to?

A

100%

47
Q

Aside from sole traders and partnerships, what else attracts 100% business relief for IHT purposes?

A

Shareholdings in unquoted and AIM companies
Shares in EIS and SEIS (subject to a two year holding)

VCT’s do NOT qualify

48
Q

When is 50% business relief in relation to IHT applicable?

A

Controlling shareholdings in fully listed companies
Land, Buildings, plant machinery used wholly or mainly in connection with a company controlled by the transferor or in partnership

49
Q

What are the rates for agricultural relief?

A

100% for owner-occupied farms and farm tenancies (exceeding 12 months)

50% for interests if lanlords in let farmland

Must have been occupied for 2 years for two years, or owned for seven years if occupied by someone else

50
Q

If both agricultural relief and business relied are available, which is claimed first?

A

Agricultural

51
Q

If there is a farmhouse used for residential purposes on a farm, does the whole property qualify for agricultural and business relief?

A

No, the difference between its open market and agricultural value would not qualify

52
Q

How does woodland relief work?

A

It defers the tax until disposal

53
Q

What is a gift with reservation?

A

A gift that is not enjoyed with the exclusion or virtual exclusion of the donor

54
Q

What are some examples of gifts with reservation?

A

A house, but continuing to live in it rent free/reduced
A painting, but on their own wall
A sum of money, but still receive the interest
A freehold interest where the donor retains the lease

55
Q

What are the consequences of a gift with reservation?

A

The value is treated as part of the estate and taxed
There may be a double IHT charge (the donor will be treated as having made a second gift when they cease to retain an interest
There is some relief available if tax has been paid at the time of the original gift (but may still use the nil rate band)

56
Q

What is the HMRC stance if the donor is a potential beneficiary under a discretionary trust?

A

It is regarded as a reservation of benefit

Note - that interest in posession and power of appointment may still carry the same view if the donor can benefit in any way

57
Q

When did the POAT (pre-owned asset tax) come into effect?

From what date can the disposal of an asset give rise to POAT?

A

6th April 2005

18th March 1986

58
Q

What type of asset could be included within POAT?

A

Land, including living accomodation
Chattels
Intangible assets (life assurance policies)

59
Q

On what is the cash value of a POAT based?

A

Property - market rentals
Chattels & intangible assets - % of capital value (2.25% for 20/21)
No tax is charged where the cash value is £5,000 or les

60
Q

What disposals are excluded from POAT?

A

Assets between spouses
Assets in which the former owner has an interest in possession (including spouse)
Assets sold at arms length, paid in cash

61
Q

What property is excluded from POAT?

A

Assets the former owner ceased to own before 18th March 1986
Assets that count as part of the taxpayers estate under the gifts with reservation rules
Where the taxpayer was formerly the owner of an asset by virtue of a will, that has subsequently be varied by agreement
Where the enjoyment is no more than incidental

62
Q

What way can clients avoid POAT?

A

By electing for the asset to be subject to IHT on deaht, by completing IHT500 by 31st January following the end of the first tax year in which income tax arises.

63
Q

What is the special premium valuation rule for life assurance policies?

A

The value is not less than the total premiums paid minus sums paid out. The normal market surrender value is used if higher

64
Q

When does the special premium rule apply?

A

Term assurance of three years or less

For terms over 3 years if;
premiums are paid for at least 2/3 of the term and premiums payable in one year do not exceed twice those in any other year

Unit linked

65
Q

Do CLT’s have to be grossed up where the transferor has paid the tax?

A

Yes - as the estate is reduced by both the value of the asset and the IHT
Tax is calcutaed on the total of the gift, plus tax

66
Q

When is tax due on a CLT?

A

Six months after the end of the month in which the transfer was made.
Transfers between 5th April and before 1st October in any year - tax is due on 30th April the following year

67
Q

If a transferor dies within 7 years of a CLT or PET, when is tax due?

A

six months after the end of the month in which the person died

68
Q

What must be paid before the LPR’s can access funds in the estate?

A

The tax due must be paid

69
Q

What determines whether tax is due on a transfer into a trust?

A

The nil rate band
Exemptions available
Terms of the trust
Any other CLT’s in the previous 7 years

70
Q

If a bare trust fails - i.e. the settlor does not survive for 7 years, who is liable for IHT?

A

The beneficiary of the trust

71
Q

For a transfer to a pre-march 2006 trust, why type of transfer is this considered to be?

A

PET - subject to the 7 year rule

The assets are deemed to be owned by the beneficiary

72
Q

For a pre-March 2006 trust, when would IHT be due of the interest in possession changes?

A

The death of the absolute beneficiary
The death of a life tenant
An appointment under a flexible trust

73
Q

If a change in an pre-March 2006 trust took place before 6th Oct 2008, how would this be treated?

How would it be treated after Oct 2008?

A

Pre - as a PET
Post - as a CLT

Of the outgoing beneficiary

74
Q

When are exit charges due on a discretionary, relevant property trust when a capital distribution or appointment of capital is made to a beneficiary?

A

During the first 10 years, chargeable at 30% of the lifetime rate that would have been charged theoretically in the 7 years prior to creating the trust

x/40 of the full tax is charged (x being the number of quarters) for which the property has been held on discretionary trust during the initial 10 year period

After 10 years - the last rate used on the tenth anniversary

75
Q

What is the 10 year periodic charge?

A

30% of the lifetime rate (20%) - subject to a maximum of 6% of the fund

76
Q

When is the beneficiary of a trust for a minor become the owner of the trust for IHT purposes?

A

Age 18

77
Q

What made Accumulation and Maintenance trusts so attractive (no longer available since March 2006)?

A

Income could be accumulated or applied for the maintenance, education or benefit of a beneficiary

They were not subject to periodic tax charges following distribution or transfer at an specific age

It enabled wealth to be passed on free of IHT provided the settlor lived past 7 years

It allowed the trustees to retain control of the capital and have discretion over income

78
Q

What options were available to the holders of A&M trusts post 2006 and before April 2008 to retain the benefits?

A
  1. The income and capital is transferred to the beneficiary at 18 (no periodic or exit charges)
  2. Capital passes to the beneficiary at 25. There would be an exit charge, but no periodic charge
  3. The trust is unchanged and capital passes after age 25. It is treated as a relevant property trust from April 2008

R03 August 2020 (12 decks)

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