Chapter 10 Inheritance tax Flashcards
1.1 Scope of inheritance tax
To be in scope there must be a transfer of value (gift, diminution in value or transfers during lifetime and on death) of chargeable property by a chargeable person.
IHT charges may arise on lifetime gifts or the death estate.
1.2 Lifetime gifts
Each gift is considered separately. Lifetime tax is calculated only on CLTs only. Calculate the chargeable amount (PETs and CLTs), calculate the amount of NRB available (only for CLTs), calculate the lifetime tax at the appropriate rate (CLT only) and then calculate the gross chargeable transfers to carry forward (PETs and CLTs).
Death tax is charged on CLTs, and PETs made in the seven years before death. We identify gifts made seven years before death, calculate the gross chargeable transfer and the amount of lifetime tax paid, calculate the amount of NRB available on death, calculate the death tax at 40% of the excess and then deduct taper relief and lifetime tax paid where appropriate.
1.3 The death estate
This is the amount of the assets owned when the taxpayer died, less debts and funeral expenses. The estate should be split into settled property (assets of any interest in possession trust in which the deceased was a life tenant, any tax due on settled property is payable by the trustees of the trust) and free estate (all other assets, debts and expenses are deducted from these assets, any tax due is payable by the personal representatives).
To calculate death tax, calculate the gross chargeable estate value, calculate residence nil rate band and general nil rate band and then calculate the death tax at 40%/36%.
If the deceased acquired property in the five years before death on which there was a charge to IHT, quick succession relief may be available to reduce the tax payable. A reduced rate of IHT is charged at 36%, if the individual’s net chargeable estate on death is left to charity. Net chargeable estate is the total value after deducting all reliefs and exemptions, but before deducting the value of the charitable gift and the residence nil rate band.
1.4 Residence nil rate band
When calculating the death tax, the availability of the residence nil rate band should be considered. The RNRB for 2022/23 is £175,000.
The RNRB is also available to individuals who downsized or ceased to have a residence if the following conditions are met:
- They downsized on or after 8 July 2015
- The former home would have qualified for the RNRB had it been held until death, and
- At least some of the estate is inherited by the deceased’s direct descendants.
If the conditions are met the downsizing allowance is equal to the RNRB lost at disposal, but this is restricted to the amount of the estate left to the deceased’s direct descendants.
2.1 Basis of assessment
If UK domiciled or deemed domiciled, they pay UK IHT on worldwide property. If non-domiciled, they pay UK ITH on UK property only.
3.1 Business property relief
This is given before all other exemptions. It applies to both lifetime transfers and transfers on death. The relief is 50% or 100%. Available if relevant business property is held and the ownership period is more than 2 years. The amount of relief depends on the property transferred. There is 100% relief for:
- Unincorporated business (sole trader business or share in partnership but not an individual asset)
- Unquoted shares (including AIM) or securities.
- Furnished holiday accommodation which is treated as a business and where there is a substantial involvement by the owner (or owners’ agent) via provision of ancillary services.
50% relief is available for:
- Quoted shares if from a controlling holding.
- L&B and P&M owned by transferor and used for business purposes in partnership in which transferor is a partner, or company which transferor controls.
All business must be trading businesses, or the shares held must be shares in trading companies.
3.2 Attributable liabilities for BPR
When calculating the value of any BPR the asset needs to be reduced to the extent of any liability taken out to acquire, maintain or enhance the value of the relevant asset. BPR only applies to the net value of the asset, after deduction of the attributable liability.
4.1 Payment of IHT
Payment of IHT is the responsibility of:
- The transferor of any lifetime tax due (unless the trustees agree to pay this)
- The transferee (recipient of the gift) for death tax on lifetime gifts
- The trustees of the relevant IIP trust for any settled property (assets of a trust for which the deceased was the life tenant)
- The personal representatives for the death tax due on the free estate. This tax will be deducted from the bequest made to the residuary legatee.
5.1 Gifts with a reservation of benefit
This is when an individual makes a gift of an asset but continues to gain from the benefit of the gifted asset. An exclusion from the rules includes when:
- The donor pays full consideration for the benefit (for example paying market rent for the gifted house)
- Virtual exclusion – minor benefits are disregarded. This includes use of property for less than 2 weeks a year if transferee is absent and use of property for less than a month when the transferee is there also.
- Change in circumstances of transferor. This includes unforeseen changes and benefit represents care/maintenance of transferor as elderly or infirm relative.
5.2 Gifts with a reservation of benefit – IHT treatment
Two calculations are required:
- Treat as PET/CLT at the time of the gift and calculate tax accordingly.
- Two possible situations. If the transferor retains benefit until death, calculate tax including gift as part of death estate or if the benefit ceases within transferor’s lifetime, treat as PET/CLT at this point and calculate tax on this basis.
36% rate of IHT does not apply to property subject to the GWR rules.
6.1 pre-owned assets
The POAT charge is a charge to IT on the transferor at their marginal rate and is based on the benefit they received. The charge is only made if:
- The transferor benefits from an asset they previously owned, and
- The transfer does not fall under the GWROB rules.
The notional income is deemed to be the annual market value rent if the cash was used to purchase land and buildings and the value of the asset multiplied by the official rate of interest if the asset is a chattel.
The value of the rent/chattel must be revisited every 5 years. If the transferor only provides part of the cash necessary to purchase the asset, the charge is apportioned to reflect this. Payments made for the use of the asset by the transferor are deductible from notional income. There is no tax charge if notional income does not exceed £5,000 (before deducting payments).
7.1 Variations
If a beneficiary of a wish wants their share of the estate to pass to someone else, they can achieve this via a variation of a will. This can be made by a beneficiary within two years of death in writing containing a statement that variation is to have effect for IHT purposes. HMRC must be notified within 6 months if additional IHT is payable, and this does not impact the CGT treatment unless specifically stated.
This can also be used to increase charitable donations, to pay IHT at the lower rate.
8.1 Interaction of CHT and IHT
A gift of an asset is potentially subject to both CGT and IHT. For CGT purposes, gift relief may be available to defer gains on qualifying business assets and any assets which are CLTs for IHT purposes. This relief takes priority over business asset gift relief, it is still available even if there is ultimately no IHT liability.
There is no CGT on death, the done receives asset at probate value for CGT purposes.
CGT IHT Gift of asset
Chargeable disposal at time of gift unless exempt No tax due unless donor
dies within 7 years (PET) value
MV, no related property rules apply – value on
a standalone basis. Quoted shares are valued
at the ½ up value
Fall in value of donor’s estate. Related property
rules apply. Quoted shares are valued at lower
of the ¼ up and average bargain price
Reliefs available
Gift relief – defers gain until sale by done,
available on business assets/shares. BADR
reduces tax to 10% and may be available
on gift of a business/shares
Business property relief reduces taxable
amount and available on business
assets/shares. Taper relief reduces tax
payable on PETs if donor dies within 3-7 years
of making the gift
Rate of tax
10%/20%/18%/28%
PET – no lifetime tax. If donor dies within 7
years, then 40%. CLT – 20% if donee pays or
25% if donor pays
Exemptions and planning
AEA. NGNL transfers between spouses
Annual exemption of £3,000 (can be bf from PY if
available). Unused proportion of nil rate band from
death of first spouse can be transferred to the other
spouse
