Ch 21. TC - Inheritance tax: basic principles

Question 1

What is a transfer of value?

Answer 1

Gift of any asset resulting inr eduction in donor’s estate

Question 2

What is a chargeable property?

Answer 2

All property to which donor is beneficially entitled

Question 3

What is a chargeable person?

Answer 3

An indiv who is

• UK domiciled (chargeable on worldwide assets)
• Not UK domiciled (chargeable on UK assets only)

Question 4

What must there be within the scope of IHT?

Answer 4

A transfer of value of chargeable property by a chargeable person

Question 5

What do gifts resulting in the reduction in the donor’s estate include?

Answer 5

Include both

• The wealth a person leaves when they die (the death estate)
• Lifetime transfers (any gift which reduces the donors estate)

Question 6

What is a death estate?

Answer 6

The wealth a person leaves when they die

Question 7

What is a lifetime transfer?

Answer 7

Any gif which reduces the donor’s estate

Question 8

What are transfers valued at?

Answer 8

Valued at their diminution in value, which is usually the open market value of the asse transferred at the time of the transfer

Question 9

Give some examples of things that are not a transfer of value for IHT purposes

Answer 9

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

Question 10

What is the pro forma for IHT

Answer 10

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

Question 11

What are the stages of the IHT calc?

Answer 11

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)

Question 12

What is the pro forma for stage 1 of the IHT calc?

Answer 12

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

Question 13

What is the pro forma for stage 2 of the IHT calc?

Answer 13

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

Question 14

What is the pro forma for stage 3 of the IHT calc?

Answer 14

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

Question 15

Give some examples of lifetime exemptions

Answer 15

Small gifts exemption
Marriage/civil partnership exemption
Annual exemption (AE)

Question 16

What do lifetime exemptions apply to?

Answer 16

Lifetime gifts only

Question 17

Describe the small gifts exemption

Answer 17

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

Question 18

Describe the marriage/ civil partnership exemption

Answer 18

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

Question 19

What is the amount of the exemption for marriage/civil partnership exemption?

Answer 19

Donor - Exempt limit 
Parent - £5k 
Grandparent/ remoter ancestor - £2.5k 
Party to the marriage/ civil partnership £2.5k 
Anyone else - £1k

Question 20

What is the annual exemption amount

Answer 20

First £3k gifted each tax year not covered by other exemptions or reliefs is exempt

Question 21

Describe the annual exemption

Answer 21

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

Question 22

What are general exemptions?

Answer 22

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)

Question 23

Which stage do lifetime exemptions apply?

Answer 23

Stage 1

Question 24

What are the types of lifetime transfer?

Answer 24

CLTs - chargeable lifetime transfers

PETs - potentially exempt transfers

Question 25

What items are classified as chargeable lifetime transfers (CLTs)?

Answer 25

- 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

Question 26

Are CLTs chargeable to IHT?

Answer 26

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)

Question 27

What transfers are classified as PETs?

Answer 27

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

Question 28

Is IHT chargeable on a PET?

Answer 28

Only if it is made in the 8 years prior to death (stage 3)

Question 29

How is the Nil Rate Band (NRB) used for calculating lifetime tax for CLTs only?

Answer 29

NRB is available prior to applying the relevant rate of tax to a lifetime gift

Question 30

What is the Nil Rate Band (NRB) for IHT?

Answer 30

£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

Question 31

How is lifetime tax calculated for CLTs?

Answer 31

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

Question 32

What is the lifetime tax rate?

Answer 32

``` It depends on who pays the tax Trustee - 20% Donor - 25% trustee twentee donaar quartaaar ```

Question 33

How do you calculate the gross chargeable transfer for CLTs?

Answer 33

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

Question 34

When is death tax due?

Answer 34

Due on any lifetime transfers within 7 years of the donor's death, as well as on the death estate

Question 35

When is death tax due?

Answer 35

Due on any lifetime transfers within 7 years of the donor's death, as well as on the death estate

Question 36

Who pays the death tax due on a lifetime transfer?

Answer 36

The recipient (donee or trustees of trust)

Question 37

What does every transfer subject to the death tax get?

Answer 37

Gets the NRB relevant in the tax year of death

Question 38

What must be done to a transfer before the NRB is deducted from each transfer in Stage 4?

Answer 38

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

Question 39

What is the % of death tax charged

Answer 39

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

Question 40

What is the different levels of taper relief and what is it given on?

Answer 40

``` Years before death 3-4 years 80% 4-5 years 60% 5-6 years 40% 6-7 years 20% ```

Question 41

How does lifetime tax affect the calculation of death tax?

Answer 41

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

Question 42

What is fall in value relief?

Answer 42

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

Question 43

What does fall in value relief not apply to?

Answer 43

Doesn't apply to - chattels with a life of no more than 50 years - plant and machinery