4 - Inheritance Tax (D & E)

Question 1

Describe a gift with reservation

Answer 1

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.

Question 2

With regards to gifts with reservations, tax laws generally seek to tax individuals based on beneficial or legal ownership?

Answer 2

Beneficial

Question 3

What type of PET is a gift with reservation?

Answer 3

Failed PET

Question 4

Which 6 gifts are excluded and therefore do not count as a gift with reservation?

Answer 4

• transfers between spouses or civil partners;
• small gifts;
• gifts in consideration of marriage or civil partnership;
• gifts to charity;
• gifts to political parties; and
• gifts for the national benefit.

Question 5

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?

Answer 5

Because it’s regarded then as a reservation of benefit

Question 6

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?

Answer 6

Not a reservation of benefit

Question 7

Although gifting between spouses if generally exempt from the gift with reservations provision, why might a donor find themselves benefiting from the reservation?

Answer 7

They continue to enjoy the gift

Question 8

What is a reversionary interest?

Answer 8

An interest that reverts back to the settlor of a trust once a beneficiary’s interest has come to an end

Question 9

How long does a gift with reservation stay in the donor’s estate?

Answer 9

As long as the donor retains a benefit in the property.

Question 10

What is the anti-avoidance legislation charge in place to stop people avoiding the GWR rules?

Answer 10

POAT - pre-owned asset tax

Question 11

When did POAT come into play?

Answer 11

6 April 2005

Question 12

How is POAT calculated?

Answer 12

On an annual cash benefit basis

Question 13

What are the 3 types of assets caught by POAT?

Answer 13

1. Land (inc. living accommodation)
2. Chattels
3. Intangible assets where settlor retains an interest (life assurance for example)

Question 14

How is the cash value benefit of land calculated for POAT?

Answer 14

The cash value of the benefit is based on market rentals.

Question 15

How is the cash value benefit of chattels calculated for POAT?

Answer 15

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%.

Question 16

What is the official interest rate for income tax?

Answer 16

2.25%.

Question 17

What’s the minimum cash value of the annual benefit for POAT to potentially apply?

Answer 17

£5,000

Question 18

What date is property valued for the purpose of the POAT charge?

Answer 18

Either:
– 6 April in the relevant tax year; or
– the date it becomes subject to the charge if that is later.

Question 19

If the property is land or chattels, how often must it be revalued for POAT?

Answer 19

Every 5 years

Question 20

Disposals of assets any time from which date, could give rise to a POAT charge?

Answer 20

18 March 1986 (the date of introduction of IHT)

Question 21

The POAT charge will not apply if the formerly-owned asset continues to be part of the donor’s estate as a gift with reservation. True or false?

Answer 21

True

Question 22

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

Answer 22

1. Worldwide assets
2. UK assets
3. does not apply to non-UK assets that they ceased to own before acquiring a UK domicile or deemed domicile.

Question 23

How is POAT valued on a) assets and b) property?

Answer 23

Assets = its value
Property = market rental value

Question 24

How can you avoid both POAT and IHT?

Answer 24

Elect to have the assets subject to IHT on death, using an IHT500 form

Question 25

What is the normal deadline for election of an IHT500?

Answer 25

31 January after end of tax year in which income arises (i.e., tax arises 2023/24, then election due by 31 January 2025.

Question 26

Can a gift with reservation give rise to POAT?

Answer 26

No, it’s one or the other