Chapter 10: Inheritance Tax Flashcards
when can inheritance tax be charged?
Life transfers:
LCT
PET
On death (death transfer)
what is a lifetime chargeable transfer?
Transferor is alive
any person/ legal entity/ specified trust
(discretionary trust, gift to a company, property trust)
NOT a disabled person/ trust
lifetime rate 20% (outside NRB)
death rate 40% (dies within 7 years)
What is a potentially exempt transfer?
Transferor is alive
cash gifts/ absolute/ bare trust/ disabled trust
charged at 0% if transferor does not die before 7 years - ‘wait and see’
charged 40% if dies within 7 years
what is ‘value’?
Money - actual value of money
Property - the amount transferors estate is reduced (market value).
what is a sale at undervalue?
someone tries to sell an item for bargain price to hide a gift.
IHT still taxed at the market value.
when is there not a transfer for value?
to fulfil obligation to maintain spouse/ child etc
sold on open market undervalue - no knowledge of doing so
To who are gifts are exempt transfers?
Spouse
Charity
Political party
National institution
Non- profit entities e.g community organisations
what is the annual exemption?
£3,000 limit per tax year on a gift - no IHT
Carry unused amount over to next year (1 year limit) £6,000 per time
what presents are exempt?
Parent - £5,000 free IHT
Grandparent - £2,500
Non relation - £1,000
when is an LCT taxed twice?
dies within 7 years
subject to lifetime tax 20%
and death rate 40%
(NRB applies)
what are the steps to calculate inheritance tax?
- What is the value of the transfer?
- Deduct any exemptions
- Deduct any reliefs
- Calculate cumulative total of all transfers to date
- Calculate anything remaining in NRB
- Apply IHT to the new transfer value at the applicable rate
- If you can - apply taper relief
what reliefs are available?
Business property relief (BPR)
Agricultural property relief (APR)
when is a BPR free of tax?
If the transferor is selling a business/ interest in a business (or partnership)
The transferor owned the business as the sole proprietor for at least 2 years
Been a partner or has shares 2 years.
Private company. (NOT a public limited company)
when is 50% of a business transfer free of tax?
Transferor control of public company
Transferring shares of that company
Transferring specified assets (land, buildings, plant, machinery) - private or public company
Company under control/ partnership by transferor
When does APR apply?
Occupied for agricultural purposes
At least 2 years by transferor
OR owned by transferor 7 years but occupied by someone else for agricultural purposes (tenant farmer)
when does taper relief apply?
ONLy on lifetime transfers
what are the taper relief rates?
Transferor dies:
6-7 years after LCT/PET only 20% payable of chargeable tax (remember NRB)
5-6 years = 40%
4-5 years = 60%
3-4 years = 80%
3 years = no taper
what is NRB?
Transfer up to £325,000 over 7 years at 0% tax rate.
when does the 7 year period start when calculating?
7 years from date of most recent transfer.
when is unused NRB transferred?
transfer unused NRB to spouse/ civil partner on death.
what is residence NRB?
residential property in the estate is transferred to direct decedent (child or grandchild) or descendent of spouse.
(Set at £175,000)
what is the effect of death on PET?
40% tax payable if nil rate band used.
what is included in the death estate for tax purposes?
joint tenancy interest - tax on half the share
gifts and interest in settled property
gift with reservation
what property is ignored by the death estate?
No property passing outside e.g policies written into a trust
what CGT are PRs liable for?
Any CGT owed by the deceased
any assets of the estate sold where the gain exceeds market value on the date of death.
what CGT are the beneficiaries liable for?
Sell inherited asset at a higher value than on the date of death - liable for CGT if they make a gain (profit)
when are PRs liable to pay income tax?
Interest gained is more than £100 from other sources (not just savings)
PRs responsible to pay e.g rent income
Pay income tax on the income of that fund.
when are beneficiaries liable to pay income tax?
Pay income tax on the income provided by an investment of the estate
Claim a tax credit on income already paid by PRs
