Chapter 21: Inheritance Tax

Question 1

What is the nil rate band?

Answer 1

Estates not exceeding £325,000

Question 2

If an estate exceeds the nil rate band after applying any available tax reliefs, what rate will it be taxed at?

Answer 2

40%

Question 3

Lifetime transfers to trusts and companies are always chargeable to inheritance tax and may suffer additional tax if the transferor dies within 7 years. True or false?

Answer 3

True

Question 4

Are lifetime transfers to individuals immediately chargeable?

Answer 4

No

Question 5

If a person is domiciled in the UK, will they be liable for IHT on all assets around the world?

Answer 5

Yes, individuals domiciled in the UK are liable for IHT on all worldwide assets

Question 6

If a person is domiciled outside the UK, but has assets in the UK, will they be liable for IHT?

Answer 6

• No, individuals domiciled outside of the UK will only be liable for IHT on UK assets.
• Any assets owned outside of the UK = excluded property

Question 7

Will IHT be payable if a person makes a transfer without gratuitous intent?

Answer 7

• Generally gifts made without gratuitous intent are disregarded for IHT purposes

Question 8

Does expenditure for family maintenance amount to a chargeable transfer?

Answer 8

No

Question 9

What is the loss to donor principle?

Answer 9

IHT is calculated by assessing the loss to the donor’s estate rather than the gain to the recipient of the gift

Question 10

What are the rules in relation to ‘related property’?

Answer 10

• If similar property is owned by a spouse, this = related property
• If the asset has a greater value when taking into account the property owned by the spouse than on a standalone basis, the asset is valued at the higher amount

Question 11

Generally, are lifetime transfers chargeable to IHT?

Answer 11

No

Question 12

Is IHT payable on transfers made to a spouse or civil partner during lifetime or on death?

Answer 12

• No, transfers to spouses are completely exempt from IHT
• Exception - if spouse domiciled outside of UK, only the first £325,000 is exempt

Question 13

Are gifts to charities exempt from IHT?

Answer 13

Yes, if the charities are in the UK or the European Economic Area

Question 14

A person can make a small gift each year which is exempt from IHT. What is the value of this small gift?

Answer 14

£250

Question 15

Is the small gift exemption cumulative or all or nothing?

Answer 15

All or nothing

Question 16

Is there a limit to a the number of donees who can receive a small gift which is not subject to IHT?

Answer 16

No limit

Question 17

On marriage, what is the maximum amount a parent can give for there to be an exemption for IHT purposes?

Answer 17

£5,000 per parent

Question 18

On marriage, what is the maximum amount a grandparent can give for there to be an exemption for IHT purposes?

Answer 18

£2,500 per grandparent

Question 19

On marriage, what is the maximum amount a bridge / groom can give before the wedding for there to be an exemption for IHT purposes?

Answer 19

£2,500

Question 20

On marriage, what is the maximum amount all others can give for there to be an exemption for IHT purposes?

Answer 20

£1,000

Question 21

Is the marriage exemption all or nothing?

Answer 21

No, the exemption can be used when transfers exceed the limits. E.g. A parent can use £5,000 of the exemption when gifting £10,000

Question 22

If a lifetime transfer constitutes ‘normal expenditure out of income’, is it subject to IHT?

Answer 22

Normal expenditure will be exempt if:

1. The expenditure is habitual or regular
2. The donor has sufficient income to maintain a normal standard of living after making gift

N.B. No monetary limit

Question 23

An annual exemption is available to reduce the IHT value of lifetime transfers. What is the value of this exemption?

Answer 23

£3,000 per year

Question 24

Can the annual exemption be carried forward?

Answer 24

• The annual exemption can be carried forward by one year
• If carried forward, the current year must be used before the previous year

Question 25

In what order is the annual exemption set against gifts?

Answer 25

In chronological order - earlier gifts before later gifts

Question 26

A PET will become a chargeable transfer if the donor dies within what timeframe?

Answer 26

7 years from the date of making the transfer

Question 27

Will gifts to bare trusts (trusts under which the beneficiaries decide when assets are to be distributed) be chargeable lifetime transfers?

Answer 27

No, these are PETs

Question 28

CLT is immediately payable to what two types of trusts?

Answer 28

1. Discretionary trusts
2. Interest in possession trusts

Question 29

Are gifts to companies PETs?

Answer 29

Gifts to companies are chargeable lifetime transfers

Question 30

Can annual exemptions be used to reduce the value of CLT payable?

Answer 30

Yes

Question 31

Who pays tax on CLTs?

Answer 31

• Either the donor or the trustees
• Tax is payable if the gift exceeds the NRB of £325,000 after deducing the available annual exemption

Question 32

What is the tax rate applicable to CLTs?

Answer 32

20% if trustees pay
25% if donor pays

Question 33

When considering inheritance tax, what is the cumulation period?

Answer 33

Taking account of any other CLTs made in the past 7 years

PETs are not considered

Question 34

When considering tax, will the NRB and IHT rates at the time of death apply? Or, instead, will the rates at the time tax is due apply?

Answer 34

The rates at the time of death