6. Inheritance Tax

Question 1

What is IHT charged on?

Answer 1

‘the value transferred by a chargeable transfer’
1. Transfer on death
2. a lifetime transfer which is potentially exempt but becomes chargeable because the transferor dies within 7 years
3. a lifetime transfer immediately chargeable at the time when it was made

Question 2

Method of Calculating IHT

Answer 2

1. Identify Transfer of Value
2. Find the value transferred
3. Apply relevant exemptions and reliefs
4. Calculate Tax at appropriate rates

Question 3

How is estate defined by the IHTA 1984

Answer 3

A person’s estate is defined as all the property to which the deceased was beneficially entitled immediately before their death, with the exception of ‘excluded property’

Question 4

When will property the deceased gave away be treated as part of the estate for IHT purposes?

Answer 4

This applies when deceased gave away property during their lifetime but did not transfer ‘possession and enjoyment’ of the property to the donee or was not entirely excluded from enjoying the property (eg. ‘giving away’ expensive jewellery but keeping it in your possession)

• therefore, property is subject to a reservation when the donor dies and the donor is treated as having beneficial entitlement on these grounds

Question 5

Property which passes outside the estate for IHT purposes

Answer 5

1. Life assurance written in trust for a named beneficiary
2. Lump sum payment made from pension fund to deceased’s family
3. Reversionary interest

Question 6

Valuing the estate: Exceptions to the basic valuation principle

Answer 6

1. BVP: things are valued at their market price
2. Shares of jointly owned land may have discounted value up to 10% for ComProp and 15% for Res Prep, with higher % if share in property is small
   - Doesn’t apply for JT, as this passes to other JT on survivorship
3. Valuing quoted shares: take 1/4 of the difference between the lower and higher price and add it to the lower price

Question 7

How are debts and expenses treated for the purposes of IHT

Answer 7

Deductible from the estate’s value transferred

Question 8

Most relevant exemptions for the estate on death

Answer 8

1. Spouse / civil partner exemption
2. Charity Exemption
3. BPR
4. APR

Question 9

Spouse or Civil Partner Exemption

Answer 9

General Rule: Property included in the estate for IHT purposes is exempt if it passes to the deceased’s spouse or civil partner under will / intestacy or survivorship
- EXCEPTION: If transferor domiciled in the UK but transferee is not, the level of exemption is limited to 325 000 (unless transferee opts to be treated as UK-domiciled for IHT purposes)

Question 10

Qualifying Interest in Possession Rules

Question 11

Charity Exemption

Answer 11

Transfers of value are exempt to the extent that the values transferred by them are attributable to property which is given to charities
- gifts to certain national bodies and bodies providing a public benefit (museums and art galleries) and political parties

Question 12

BPR

Answer 12

Reduces value transferred by a transfer of value of relevant business property by a certain %

Question 13

Relevant Business Property

Answer 13

General Rule: Business must be ‘trading’ in nature (not one dealing in investments or land) and relief depends on type of property transferred

1. 100%: transfers of value where value transferred is attributable to certain types of ‘business property’: (a) a business or an interest in a business (including a partnership share) (b) company shares not listed on recognised stock exchange
2. 50%: any other relevant type of business property:
   a. Company shares listed on recognised stock exchange if transferor had voting control of company immediately before transfer (over 50% of votes on all resolutions, sometimes voting rights of spouses and civil partners can be added to this to give a combined percentage)
   b. land, buildings, machinery or plant owned by the transferor personally but used for business purposes by a partnership of which the transferor is a member (or by a quoted or unquoted company, of which the transferor has voting control)

Question 14

Time Limits for BPR + exceptions

Answer 14

asset(s) must have been owned by the transferor for at least two years at the time of the transfer or must be a replacement for relevant business property where the combined period of ownership is two years
- Inherited property from spouse / civil partner: survivor deemed to have owned it from the date it was originally acquired by the deceased (rule does not apply to lifetime transfers)

Question 15

How does APR apply?

Answer 15

Property is given an ‘agricultural value’ - value if it were subject to covenant prohibiting its use for anything other than agriculture
- this value is reduced by a certain %

Question 16

100% reduction for APR:

Answer 16

100%: allowed where either (broadly) the transferor had the right to vacant possession immediately before the transfer or where property was subject to a letting commencing on or after 1 September 1995

Question 17

50% reduction in APR

Answer 17

Requirements for any reduction: either property occupied by transferor for purposes of ag. for 2 years prior to transfer or it was owned by transferor for 7 years prior to transfer and was occupied by someone throughout that period for ag. purposes