Chapter 11: Inheritance Tax

Question 1

What is inheritance tax

Answer 1

Tax on a transfer of wealth

can be charged on certain gifts made during an individuals lifetime as well as death

Question 2

Persons chargeable to IHT

Answer 2

If an individual is UK domiciled or deemed UK domiciled they will be liable to IHT tax on their worldwide transfer of assets

If not UK domiciled, only liable to IHT tax on transfer of assets located in the UK

Question 3

Nil rate band

Answer 3

NRB taxed at 0% on £325,000

Transfers are taxed on a rolling 7 year accumulation. This means you need to look back 7 years from the date of a chargeable transfer to see whether any of that NRB has been used up by chargeable transfers in the 7 year period

When calculating the death tax in the death estate, there is an additional residence nil rate band 175,000 which can be deducted provided the deceased home is included in the death estate and is left to a direct descendent (including children, grandchildren, and stepchildren) after 6th April 2017)

Any unused nil rate band or residence nil rate band on the death of the first spouse can be used by the second spouse.

Question 4

Gifts in lifetime

Answer 4

IHT should be in chronological order, meaning gifts should be taken into account before transfers at death.

Lifetime transfers will be:
-Chargeable lifetime transfers (CLT)
-Potentially Exempt Transfers (PET)
-Exempt Transfers (ET)

Question 5

CLT (Chargeable lifetime transfers)

Answer 5

A CLT is a gift to a trust

A trust is where a party is appointed as a trustee(s) to look after the assets of the beneficiary(ies)

-lifetime tax charged at 20%
-Addtional death tax, may be payable is the donor dies within seven years of the CLT
-Lifetime tax is deducted from any additional death tax due

Question 6

Potentially Exempt Transfer (PET)

Answer 6

Lifetime transfer between individuals

-Never any lifetime tax to pay
- PET will only be chargeable to IHT tax if the donor dies within 7 years after the transfer
-PET becomes exempt if donor survives 7 years after making the gift

Question 7

Exempt transfer (ET)

Answer 7

-Gifts to spouse or civil partner
-Gifts to charities
-Gifts for national purposes
-Gifts to qualifying political parties

Question 8

Annual Exemptions

Answer 8

first £3000 of value transferred in the tax year is exempt and will be set up against the first gifts in the year, whether it be a PET or CLT

Can be carried forward for one year only and used after the annual exemption in the following year

Question 9

Transfers within 7 years of death

Answer 9

Lifetime gifts made within 7 years before death will be liable to death tax if they succeed the available remaining nil band

Nil rate band available to use against the gift is reduced by the accumulated transfers in the 7 years before the date of the gift

Question 10

Person receiving the gift (donee)

Answer 10

responsible for paying any death tax on lifetime gifts

Question 11

Tapering Relief

Answer 11

In ref material

Reduced IHT due on death if the donor survives at least 3 years after making the gift

Reduction to the tax due, so needs to be calculated after tax has been calculated

Question 12

CLT Summary

Answer 12

Lifetime tax 20%

No further IHT if donor survives 7 years

Death tax 40% if donor dies within 7 years. Tapering relief if donor survives more than 3 years.

Lifetime tax is deducted from the amount owed

Question 13

PET Summary

Answer 13

No IHT in lifetime

No IHT if donor survives 7 years

Death tax @40% if donor dies within 7 years.
Tapering relief if donor survives 3 years or more

Question 14

ET Summary

Answer 14

No IHT in lifetime or death

Question 15

Death Estate

Answer 15

Consists of net assets (and liabilities) held at the time of donor’s death and it is chargeable to death tax.

The donor is transferring the assets at the date of death to another individual, usually outlined in their will

annual exemption not available

Question 16

Tax on death tax

Answer 16

Any gifts made within 7 years of death

40% after deducting the remaining nil rate band and if applicable the additional residence nil rate band

Question 17

Tax paid and suffered - death estate

Answer 17

Paid out of the value of the assets in the estate by the executor and is suffered by the final named beneficiary of the will who is referred to as the residuary legatee

Question 18

Death estate - transfer of the nil rate band and additional residential nil rate band

Answer 18

unused nil rate band and additional residential band arising on the death of a spouse/civil partner can be transferred

this is added to the spouse/civil partners nil rate band by the percentage/proportion of the nil rate band unused by the first spouse

That proportion is applied to the nil rate band at the date of the survivors death in order to calculate the value of additional nil rate band available

Question 19

Tax planning

Answer 19

Give away assets now and hope to survive 7 years

use the 3000 each each

use as many exemptions as possible such as small gifts and marriage

use up to 325000 every 7 years

Avoid giving away assets during lifetime that will be chargeable to Capital Gains Tax, and then potentially chargeable to IHT if death occurs within 7 years

Skip a generation, if a father gifts to daughter. IHT may be payable, if the daughter gifts to her daughter IHT may be payable again, it would be better for the grandfather to gift directly the grandchild