Ch 21. TC - Inheritance tax: basic principles Flashcards
What is a transfer of value?
Gift of any asset resulting inr eduction in donor’s estate
What is a chargeable property?
All property to which donor is beneficially entitled
What is a chargeable person?
An indiv who is
- UK domiciled (chargeable on worldwide assets)
- Not UK domiciled (chargeable on UK assets only)
What must there be within the scope of IHT?
A transfer of value of chargeable property by a chargeable person
What do gifts resulting in the reduction in the donor’s estate include?
Include both
- The wealth a person leaves when they die (the death estate)
- Lifetime transfers (any gift which reduces the donors estate)
What is a death estate?
The wealth a person leaves when they die
What is a lifetime transfer?
Any gif which reduces the donor’s estate
What are transfers valued at?
Valued at their diminution in value, which is usually the open market value of the asse transferred at the time of the transfer
Give some examples of things that are not a transfer of value for IHT purposes
Normal expenditure out of income is NOT a transfer of value
A bad business deal, with no gratuitous intent, is not a transfer of value for IHT purposes
What is the pro forma for IHT
The gifts along the top, with the date and whether PET/CLT
Down the side: Stage 1 - Calc the chargeable amount Transfer BPR/APR Specific exemptions Annual exemption CY Annual exemption PY = Chargeable amount
Stage 2 - Calculate lifetime tax (CLTs only) Chargeable amount X Nil rate band available (X) = Taxable amount Lifetime tax @ 20% / 25% = Gross chargeable transfer X
Stage 3- Calc death tax (gifts 7 years ore death and death estate only) Gross chargeable transfer X Fall in value relief (X) Residence NRB available (X) = Taxable amount X
Death rate @ 40% X Taper percentages Tapered amount due X Lifetime tax paid (X) Quick succession relief (X)
= Death tax payable X
What are the stages of the IHT calc?
Stage 1 - Calc the chargeable amount
Stage 2 - Calculate lifetime tax (CLTs only)
Stage 3 0 Calc death tax (gifts 7 years ore death and death estate only)
What is the pro forma for stage 1 of the IHT calc?
The gifts along the top, with the date and whether PET/CLT
Down the side: Stage 1 - Calc the chargeable amount Transfer BPR/APR Specific exemptions Annual exemption CY Annual exemption PY = Chargeable amount
What is the pro forma for stage 2 of the IHT calc?
The gifts along the top, with the date and whether PET/CLT
Down the side:
Stage 2 - Calculate lifetime tax (CLTs only) Chargeable amount X Nil rate band available (X) = Taxable amount Lifetime tax @ 20% / 25% = Gross chargeable transfer X
What is the pro forma for stage 3 of the IHT calc?
Stage 3- Calc death tax (gifts 7 years ore death and death estate only) Gross chargeable transfer X Fall in value relief (X) Residence NRB available (X) = Taxable amount X
Death rate @ 40% X Taper percentages Tapered amount due X Lifetime tax paid (X) Quick succession relief (X)
= Death tax payable X
Give some examples of lifetime exemptions
Small gifts exemption
Marriage/civil partnership exemption
Annual exemption (AE)
What do lifetime exemptions apply to?
Lifetime gifts only
Describe the small gifts exemption
Lifetime transfers of value made by a donor in any one tax year are exempt if they don’t exceed £250 per recipient per tax year
This exemption ca’t exempt part of a larger gift
Describe the marriage/ civil partnership exemption
Relief is given for gifts made to a party of the marriage / civil partnership
The amount depends on the relationship of the donor to the recipient
The exemption can exempt part of a larger gift
What is the amount of the exemption for marriage/civil partnership exemption?
Donor - Exempt limit Parent - £5k Grandparent/ remoter ancestor - £2.5k Party to the marriage/ civil partnership £2.5k Anyone else - £1k
What is the annual exemption amount
First £3k gifted each tax year not covered by other exemptions or reliefs is exempt
Describe the annual exemption
First £3k gifted each tax year not covered by other exemptions or reliefs is exempt
Unused AE can be carried fwd 1 year, but CY AE is offset first
It is always applied chronologically even if the first gift is a PET which never becomes chargeable
What are general exemptions?
The following transfers, whether made either in life or on death are exempt fro IHT
- to the donor’s spouse/ civil partner
- to charity
- to qualifying political parties (2 MPs or 1 MP and at least 150k votes)
Which stage do lifetime exemptions apply?
Stage 1
What are the types of lifetime transfer?
CLTs - chargeable lifetime transfers
PETs - potentially exempt transfers
What items are classified as chargeable lifetime transfers (CLTs)?
- The creation of or a transfer to a discretionary trust
- The creation of a non-qualifying interest in possession trust (IIP) on/after 22 March 2006
Are CLTs chargeable to IHT?
Yes IHT is chargeable on a CLT both
- at the time the gift is made (stage 2)
- at time of death if the CLT was made in the 7 years prior to death (Stage 3)
What transfers are classified as PETs?
All other lifetime transfers except CLTs, which includes
- Transfers to indivs (other than spouse/civil partners)
- Transfers to an IIP trust before 22 March 2006
- Transfers to a qualifying IIP trust on/after 22 March 2006
Is IHT chargeable on a PET?
Only if it is made in the 8 years prior to death (stage 3)
How is the Nil Rate Band (NRB) used for calculating lifetime tax for CLTs only?
NRB is available prior to applying the relevant rate of tax to a lifetime gift
What is the Nil Rate Band (NRB) for IHT?
£325,000 since TY 09/10
Was £312,000 in TY 2008/09
If the CLT took place before TY 08/09 the NRB will be given
How is lifetime tax calculated for CLTs?
The NRB available is deducted prior to applying the relevant rate of tax to a lifetime gift
After the NRB is deducted lifetime tax is calculated
What is the lifetime tax rate?
It depends on who pays the tax Trustee - 20% Donor - 25% trustee twentee donaar quartaaar
How do you calculate the gross chargeable transfer for CLTs?
Before the NRB is deducted, it must be reduced by the gross chargeable transfer (GCT) value of any CLTs made in the 7 years prior to the Cut we are taxing
- If the trustees pay the tax, the amount gifted is considered to be gross of tax, so the CGT is simply the chargeable amount
- if the donor pays the tax, the amount gifted is considered to be net of tax, so the GCT is the chargeable amount plus any lifetime tax paid by donor
When is death tax due?
Due on any lifetime transfers within 7 years of the donor’s death, as well as on the death estate
When is death tax due?
Due on any lifetime transfers within 7 years of the donor’s death, as well as on the death estate
Who pays the death tax due on a lifetime transfer?
The recipient (donee or trustees of trust)
What does every transfer subject to the death tax get?
Gets the NRB relevant in the tax year of death
What must be done to a transfer before the NRB is deducted from each transfer in Stage 4?
It is reduced by the GCT value of any PETs or CLTs which are
- Within 7 years prior to the particular transfer
- Chargeable to IHT (lifetime tax/ death tax for CLTs, death tax for PETs)
This means that PETS outside 7 years prior to death are ignored in stage 3 of the calc
What is the % of death tax charged
After the deduction of the NRB, the remainder is taxed at 40%
But taper relief is given for gifts made more than 3 years before death
What is the different levels of taper relief and what is it given on?
Years before death 3-4 years 80% 4-5 years 60% 5-6 years 40% 6-7 years 20%
How does lifetime tax affect the calculation of death tax?
Lifetime tax already paid in respect of CLT is deducted from the death tax in respect of that same CLT
But this deduction can’t generate a repayment
What is fall in value relief?
The transferee can claim to use a lower chargeable value when calculating the death tax on a lifetime transfer if:
- The transfer still owns the asset received but eh MV on death is below the MV at the date of transfer
- the transferee sold the asset before the death of the donor but the MV at sale was below the MV at the date of transfer
The reduction in value isn’t used when calculating the GCT for NRB purposes
What does fall in value relief not apply to?
Doesn’t apply to
- chattels with a life of no more than 50 years
- plant and machinery
