6c. Tax - Probate Flashcards
Taxation of estates in administration
What is personal representative’s obligation regarding a deceased’s tax return?
PR must complete the deceased’s tax return for the period from April 6 to date of death, including capital gains
Taxation of estates in administration
Until it is distributed, who does the income generated by assets within the estate belong to, and therefore who must pay the income tax?
PRs, under the usual self assessment rules
Taxation of estates in administration
What can PRs do instead of filing annual self-assessment returns on behalf of the estate?
Make an informal payment covering the total liability for the whole period of administration, with a single income tax and capital gains tax calculation
Taxation of estates in administration
For an estate in administration, what is the income tax rate applicable to (1) non-savings income and interest and (2) dividends, irrespective of amount?
Is the personal allowance, personal savings allowance, or dividend allowance available?
Basic rate for both so:
- Non-savings income/interest: 20%
- Dividends: 8.75%
No
Taxation of estates in administration
If PRs took out a loan to pay IHT, what can be deducted from income?
Interest on the loan
Taxation of estates in administration
If a beneficiary is left an asset under a will, when are they deemed to have acquired the asset and at what valuation?
They are deemed to acquire the asset at the date of death for probate value, i.e. market value at the date of death.
(Value at time of distribution is irrelevant)
This is also the value at which the PRs are deemed to acquire the asset (PRs liable to CGT on any disposals during administration)
Taxation of estates in administration
In the context of CGT, for what periods will the PRs receive the annual exempt amount?
Year of death and the subsequent two years
Taxation of estates in administration
For an estate in administration, what are the capital gains tax rates which apply?
Upper rate, so 20% for all assets except residential property which is 28%
Taxation of estates in administration
Is a disposal by a PR to a beneficiary in settlement of a legacy under a will considered a disposal for capital gains tax purposes?
No
Inheritance tax
What is the current inheritance tax nil-rate band (NRB), and what is the inheritance tax rate (IHT)?
£325,000. 40%.
Inheritance tax
When are lifetime transfers to trusts and companies chargeable to IHT, to the extent they exceed the NRB?
What is a lifetime transfer to an trust or company known as?
Chargeable when made
This is known as a chargeable lifetime transfer, chargeable at 20% or 25% depending on the payor
Inheritance tax
When are lifetime transfers to individuals chargeable to IHT, to the extent they exceed the NRB?
What is a lifetime transfer to an individual known as? If a donor dies within seven years of this, who is the tax payable by?
When the donor dies within seven years
This is known as a potentially exempt transfer. Tax is payable by the recipient.
Inheritance tax
The transfers of what assets are chargeable to IHT depending on whether the donor is domiciled:
(1) in the UK and
(2) outside the UK?
What is the term given to a non-domiciled donor’s assets located outside the UK?
Domiciled in UK: All worldwide assets, wherever situated
Not domiciled in UK: UK assets only
Excluded property
Inheritance tax
What are the two primary considerations when determining whether a transfer is a chargeable transfer?
- Whether there has been a reduction in value in the estate as a result of the transfer
- Whether donor intended to make a transfer of value
Inheritance tax
Selling something below market value would cause a reduction in value of the estate. When is this not deemed a transfer for IHT purposes?
When the transfer is to an unconnected person and there is no gratuitous intent behind the lower price
Family are not unconnected
Inheritance tax
What is one exception to the general rule that a reduction in value of the estate will render a transfer chargeable?
Expenditure on the maintenance of one’s family
Inheritance tax
Under the related property rule, how is transferred property valued if it is worth more when combined with property already owned by the recipient, e.g. 10% of shares transferred to someone who already owns 41% makes their entire holding more valuable on single-share basis?
The transferred property is valued at the higher amount
Inheritance tax
What is a potentially exempt transfer?
A lifetime gift to an individual
It is neither exempt nor chargeable, but becomes chargeable if the donor dies within seven years
Inheritance tax
What is the spouse/civil partner exemption to IHT on both lifetime transfers and transfer on death?
What is the exception to this?
Completely exempt from IHT
If the donor spouse is UK-domiciled and the recipient spouse is non-UK domiciled, only the first £325,000 is exempt
Inheritance tax
What other transfers, both lifetime and on death, are exempt from IHT?
- Gifts to charities in UK and EEA, with no limit
- Small gifts of £250 or less, with no limit on the amount of recipients
- Wedding gifts
- Normal expenditure out of income
Inheritance tax
What does it mean that the small gift exemption is an all or nothing exemption?
If the gift exceeds £250 at all, the entire gift is chargeable, not just the portion which exceeds the threshold
Inheritance tax
What are the limits on exempt lifetime gifts on marriage for:
(1) a parent,
(2) a grandparent
(3) bride to groom (vice versa), and
(4) all others?
Is the wedding exemption all or nothing?
- £5,000
- £2,500
- £2,500
- £1,000
The limit applies per donor, per wedding
No
Inheritance tax
What is the annual exemption for lifetime transfers?
Can unused amounts be carried forward?
£3,000
Unused amounts can be carried forward one year and a current year’s exemption is used before the previous one
Inheritance tax
What two monetary amounts must be deducted before calculating the tax on a chargeable lifetime transfer?
- Remaining NRB
- Available exemptions, max of £6,000 if carrying over a full unused year
Inheritance tax
What are the two tax rates applicable to CLTs if paid by (1) the trustees, and (2) the donor?
- Trustees: 20%
- Donor: 25%
Inheritance tax
What is the time period within which we assess previous gifts made for the purposes of determining the NRB remaining?
Seven years
Inheritance tax
To summarise, what are the five steps for calculating lifetime tax?
- Identify the value transferred using the loss to donor principle
- Deduct annual exemptions to arrive at the CLT
- Identify the NRB for the year of transfer
- Deduct from NRB other chargeable transfers made within seven years
- Pay tax on the excess at 20/25%
Inheritance tax
In determining tax owed on a potentially exempt transfer after death, what NRB and tax rates are operative?
The ones at the date of death
Inheritance tax
In determining tax owed on a PET, from what period do we look back seven years?
Seven years from the date of the PET, not death
Inheritance tax
After what period between the PET and death does taper relief kick in?
What is the process for tapering tax payable on a PET?
3 years
First calculate the full tax owed, and then reduce that monetary amount by the relevant %
Inheritance tax
What are the four taper percentages available to PETs where the donor dies:
1) 3-4 years
(2) 4-5 years
(3) 5-6 years, and
(4) 6-7 years
after the PET?
3-4 years: 20%
4-5 years: 40%
5-6 years: 60%
6-7 years: 80%
Inheritance tax
What are the three steps for working out additional tax payable at death on a CLT, where a donor dies within seven years?
What taper relief is available to tax payable at death on a CLT?
- Start with CLT
- Calculate NRB remaining
- Pay tax at 40%
Trustees pay it, but receive a credit for the lifetime tax already paid
The same as with PETs, and kicks in after three years.
Inheritance tax
Where additional tax is payable on a CLT, what will trustees receive a credit for?
Any lifetime taxes paid on the CLT
Inheritance tax
What are the two IHT reliefs?
- Business relief
- Agricultural relief
Inheritance tax
What is business relief for IHT?
The value of business property given as a lifetime gift to a trust or at death is reduced by either 100% or 50%, before any annual exemptions, and occurs automatically if the conditions are satisfied
Business must be trading, i.e. buying/selling goods or services, but can be overseas
Inheritance tax
What two assets qualify for 100% business relief?
- Sole-trade business or partnership interest
- Any number of shares in unlisted trading company
Inheritance tax
What two assets qualify for 50% business relief?
- Shares in a listed company if the donor owns 50% or more
- Land, buildings, and plant/machinery owned by an individual but used by a company they control or partnership in which they are a partner
Inheritance tax
What is the general rule as to how long a donor must have owed property before the transfer before it qualifies for business relief?
What are two exceptions to this rule?
Two years
- Replace one business property asset with another within three years
- Inheriting business property assets from spouse
Inheritance tax
What is agricultural relief?
100% relief, operating similarly and available in addition to business relief, but applies to agricultural property
Inheritance tax
What is agricultural property and what are the geographical limits of this relief?
Land or buildings used for the purposes of agriculture, within UK, Channel Islands, Isle of Man, or EEA
Inheritance tax
What are the two types of people to whom agricultural relief will apply?
- Farmer who owns the land and buildings and uses these in their own business
- Landowner who is letting out agricultural land to a farmer
Therefore, the landowner need not actually farm the land themselves for agricultural relief to be available
Inheritance tax
For how long before the transfer must the land have been owned in the case of:
(1) occupation by the transferor and
(2) where the transferor was letting out the land?
Occupation by transferor: Two years
Tenanted land: Seven years
Inheritance tax
When will business relief and agricultural relief be available at the same time?
What is the priority of these reliefs?
When a farmer runs a farming business
Agricultural relief applies first to the agricultural value of the property, and business relief may be applied to the excess value in respect of assets used in the farming business which are not agricultural property
Inheritance tax
When will business relief not be available in addition to agricultural relief?
Why?
When the farmland is let out by the landowner
Because the landowner is not engaged in the business
Inheritance tax
At the point of death, what is the deceased deemed to have made a chargeable transfer of?
The net value of their assets at the date of death
Net value is the total value of the assets owed by the deceased, less funeral expenses and any debt or liabilities owed by the deceased, but not probate costs
Inheritance tax
By whom is IHT payable by?
Is the £3,000 (or £6,000 if carried over) annual exemption available to reduce the value of the chargeable death estate?
PRs
No
Inheritance tax
What are the four steps for calculating tax on death?
- Start with NRB for year of death
- Reduce NRB by value of CLTs and PETs within seven years of death
- Reduce the net value of the estate by the remaining NRB
- Tax the balance at 40%
Inheritance tax
What transfers are exempt from IHT on death?
- Gifts to spouse/civil partner
- Gifts to UK/EEA charities
If the deceased was UK-domiciled but spouse is not, the limit of the exemption is £325,000
Inheritance tax
What % of net estate or baseline amount must be given to charity to benefit from a lower IHT rate, and what is that rate?
For the purposes of the charity rate reduction, what is the baseline amount?
10% of estate or baseline amount must be given to charity for the IHT rate to be reduced to 36% from 40%
Value of estate chargeable to IHT after deducting all available reliefs, exemptions, and the available NRB, but excluding the actual portion given to charity
Inheritance tax
What are two exceptions to the general rule that the value of an asset is its market value at the date of death?
- Quoted shares
- Jointly owed assets
Inheritance tax
How are (1) quoted shares valued and (2) jointly owned assets valued?
- Per the official list published by the Stock Exchange at the date of death
- Under the related property rules already discussed, i.e. we take a higher valuation if the property is worth more combined with property already owed by the recipient
Inheritance tax
What are three liabilities that can be deducted from the estate, and what is one that cannot be?
Can deduct:
1. Mortgages
2. Income tax owed
3. Reasonable funeral expenses
Cannot deduct:
Probate costs
Inheritance tax
What is the transferable nature of the NRB?
How is the uplifted NRB calculated?
If an individual dies leaving some or all of their NRB, a claim can be made for the unused amount to be transferred to their spouse, who will then have an uplifted NRB
Uplift the spouse’s current NRB at its current rate by the deceased’s unused % of their NRB at the rate at the time
Inheritance tax
How is an uplifted NRB claimed in practice?
What is one thing an uplifted NRB cannot be used for?
On the death of the first spouse, it is recorded as part of the second spouse’s NRB. Upon the second spouse’s death, their executors make the claim
Lifetime tax on second spouse’s CLTs, for the reason above
Inheritance tax
Can an individual claim an uplifted NRB from more than one deceased spouse?
Yes, but the uplift is capped at 100% on top of their own NRB (i.e. double their NRB)
Inheritance tax
What two criteria must be satisfied for the residence nil-rate band (RNRB) to be available in addition to the regular NRB?
What is the maximum relief available under the RNRB?
- Estate includes a home that was used as the deceased’s private residence at some point, and
- Home or its sale proceeds are left to lineal descendants or spouses of such
£175,000
Inheritance tax
To avail of the RNRB, is it necessary for the descendants to occupy the property after death?
No
Inheritance tax
Does the RNRB apply to lifetime transfers?
No, to the death estate only
Inheritance tax
At what total estate net valuation does the RNRB begin to taper away, and what is the rate of taper?
At what total estate valuation is the RNRB effectively lost?
£2 million.
£1 taper for every £2 over
Effectively lost at £2.35m.
Inheritance tax
What is net valuation for the purposes of RNRB taper?
Assets minus liabilities, but before deducting reliefs
Inheritance tax
What are the two main reasons why RNRB would be left over to uplift that of the deceased’s spouse?
- First spouse did not have a qualifying home
- First spouse did not have or leave home to lineal descendants
Inheritance tax
Can an individual claim an uplifted RNRB from more than one deceased spouse?
Yes, but like the NRB, the uplift is capped at 100% on top of their own RNRB (i.e. double their RNRB)
Inheritance tax
What is the downsizing uplift in the context of RNRB?
Where a residence valued in excess of the RNRB is sold and replaced with a new residence which is valued at less than the RNRB or is gifted in a way which some of the RNRB will be unused, an uplift can be claimed reflecting the amount of RNRB which could have been used if it was the more expensive property that was gifted
Inheritance tax
When is quick succession relief available?
Under quick succession relief, by what % is the relief reduced for each year between the donor’s death and the recipient’s death?
When an individual’s estate increased due to a chargeable transfer (on which IHT was paid) made to them in the five years before their death
20%
Inheritance tax
To apply for quick succession relief, does the deceased recipient still have to own the property at the date of death?
No
Inheritance tax
What is a gift with reservation of benefit?
Where an individual gives away an asset but continues to be able to benefit from that asset, it is still treated as part of the donor’s estate at the date of death
Inheritance tax
What action can the donor take to negate the rules on gifts with reservation of benefit in the context of giving away a house but continuing to live in it?
Pay market rent to the recipient
Inheritance tax
How can a donor who would otherwise be deemed to have made a gift with reservation of benefit avoid the rule?
Where a benefit is released before death, how does HMRC treat the release?
Release the benefit, e.g. move out of the house, before death
As a PET valued at the date of release
Inheritance tax
In the context of gifts with reservation of benefit, when will Pre-Owned Asset Tax apply?
When the rule has been avoided by, e.g., selling a house, making a cash gift which is used by the donee to purchase a property in which the donor lives rent free
The former property owner pays income tax on the market value of their benefit
Inheritance tax
When is tax payable on a CLT?
Who has primary liability to pay tax on a CLT, and who can HMRC pursue if this party fails to pay?
Later of:
- Six months from the end of the month in which the CLT was made, or
- 30 April after the tax year in which it was made
Donor. HMRC can pursue recipients.
Inheritance tax
When is IHT due for a:
(1) PET where donor dies within seven years, and
(2) transfer on death?
- Six months after the end of the month in which the death occurred, payable by recipient
- Same, payable by PRs
Same with additional tax on a CLT, payable by trustees of the recipient trust as donor is dead
Inheritance tax
In the case of both CLTs and PETs, who may become liable if the tax remains unpaid 12 months after the date of death?
The PRs
Inheritance tax
What is the liability and what is the burden with regard to tax?
Liability: who must pay tax
Burden: the source of the funds used to pay tax
Inheritance tax
Who is primarily liable for tax attributable to property subject to a gift with reservation of benefit?
Recipient
PRs liable if not paid within 12 months
Inheritance tax
Who is liable for tax on property passing outside a will or intestacy and who ultimately bears the burden?
PRs liable. Beneficiaries bear the burden.
Inheritance tax
Why is it tax efficient to make lifetime gifts of appreciating assets?
Because for IHT purposes, it is the value at the date of transfer, not death, that applies
