4 - Inheritance Tax (H)

Question 1

Which financial planning tool could you use to make a gift to a young person, but want to keep control of it until they are old enough?

Answer 1

Trust

Question 2

If you make a gift into trust and include yourself as a beneficiary, what type of gift is this?

Answer 2

Gift with reservation

Question 3

What is the main purpose of a life assurance plan for IHT purposes?

Answer 3

To provide a tax-free cash lump sum to pay any liability owed

Question 4

Creation of a bare/absolute trust, is what type of transfer of value?

Answer 4

PET

Question 5

Creation of a disabled trust, is what type of transfer of value?

Answer 5

PET (even if discretionary!)

Question 6

What are the exit and periodic charges on a disabled trust?

Answer 6

There are none

Question 7

In which circumstances can a settlor create a disabled trust with self-interest, and still escape IHT?

Answer 7

If they can show that their current condition will lead to disability in the future

Question 8

For trusts established before 22 March 2006, the creation during the settlor’s lifetime was which type of transfer of value?

Answer 8

PET

Question 9

In which type of trust does the beneficiary have a life ‘interest’ or life ‘rent’?

Answer 9

Interest in possession trust

Question 10

What are the 3 key dates regarding the taxation of IIP trusts?

Answer 10

22 March 2006
22 March 2006 - 5 October 2008
5 October 2008

Question 11

Broadly, what is meant by someone having an interest in possession?

Answer 11

The beneficiary is entitled to trust income from the asset as it’s produced, this is known as their “interest in possession”

Question 12

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?

Answer 12

1. Death of absolute beneficiary
2. Death of life tenant
3. Appointment under a flexible trust

Question 13

A change to an interest in possession trust that was created before 22 March 2006, is deemed a PET if the change occurred when?

Answer 13

Before 6 October 2008, after this date they will treated as a CLT

Question 14

Mary is the life tenant of a trust created in January 2004 with property she also has a personal estate of £200,000, which she has left to her worth £200,000 and children in her will. If Mary died on 20 August 2023, what is her IHT liability? RNRB is not available.

Answer 14

(£400,000 – £325,000) × 40% = £30,000
IHT will be based on the trust property (because the trust was created before 22 March 2006) plus her personal estate.

Question 15

If an interest in possession trust was created after 22 March 2006, what type of ‘transfer of value’ is this?

Answer 15

Chargeable lifetime transfer (CLT)

Question 16

An interest in possession trust created after 22 March 2006, is liable to entry, exit and periodic charges, except in which 2 circumstances?

Answer 16

1. trusts for disabled or vulnerable persons; or
2. IPDI trusts created on death by will or intestacy.

Question 17

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?

Answer 17

22 March 2006

Question 18

When there is a life interest (an entitlement to income for life), who has the interest in possession?

Answer 18

Life tenant

Question 19

What is an IPDI trust?

Answer 19

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.

Question 20

What is the IHT treatment on an IPDI trust?

Answer 20

No IHT on death of first spouse, and their NRB remains in tact

Question 21

What is a “same day addition” when referring to trust planning?

Answer 21

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

Question 22

When does the periodic tax charge occur on a discretionary trust?

Answer 22

On each tenth anniversary of the date of the creation of
the trust.

Question 23

What is the periodic tax charge rate on a discretionary trust?

Answer 23

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.

Question 24

What is the maximum rate of tax during the life of a discretionary trust?

Answer 24

6%

i.e. 30% × 20%, every ten years.

Question 25

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?

Answer 25

Because the character of the “income” actually becomes “capital” instead

Question 26

What type of transfer of value is involved for inheritance tax (IHT) purposes when an interest in possession trust is created on 15 April 2016?

Answer 26

CLT

Question 27

How are trusts for bereaved minors and 18 to 25 trusts created?

Answer 27

On the death of a parent by their will or intestacy or;
Under the Criminal Injuries Compensation Scheme.

Question 28

At what age must an absolute interest be given with bereaved minors trusts and 18 to 25 trusts?

Answer 28

Bereaved minors = 18
18-25 = 25

Question 29

With a trust for a bereaved minor, what are the periodic and exit charges?

Answer 29

There are no periodic charges or exit charges provided the income and capital of the trust go to the beneficiary

Question 30

At what age must absolute interest be given in a trust for a bereaved minor?

Answer 30

18

Question 31

At what age must absolute interest be given to a specified beneficiary in an 18-25 trust?

Answer 31

No later than 25

Question 32

What is meant by absolute interest?

Answer 32

Absolute interest means anybody with a total ownership/right to any asset or property

Question 33

The beneficiary of an 18 to 25 trust is only treated as owning the trust assets for IHT purposes until they reach what age?

Answer 33

18

Question 34

When is the exit charge levied on an 18-25 trust?

Answer 34

When the absolute entitlement is given, based on the period since the beneficiary’s 18th birthday.

Question 35

How will most trusts created on or after 22 March 2006 that create flexible interest in possessions be treated for IHT purposes?

Answer 35

As chargeable lifetime transfers (CLTs)