Chapter 4 - Inheritance Tax

Question 1

Residency and IHT

Answer 1

• UK domiciled - IHT on all assets (whether in UK or not)
• Non-UK domiciled - IHT only on property within the UK
• UK domiciled if resident in UK for 15 out of the last 20 tax years
• If born in UK, with UK domicile of origin, and return to UK and become UK resident having previously become domiciled in another country will be deemed domicile for Income tax and CGT straight away
  o Only deemed domicile for IHT under above rule if also been resident in UK at least 1 out of previous 2 tax years
• Non-domiciles with UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes
• This means their worldwide assets are then subject to IHT but full spouse exemption (not capped at £325,000)
• Domicile status is lost once an individual has been non-resident for at least four consecutive tax years

Question 2

Shares / Collectives

Answer 2

• If price sold less than market value at death, IHT based on sale price
• Must be sold within 1 year of death

Question 3

Land

Answer 3

• If price sold less than market value at death, IHT based on sale price
• Must be sold within 3 or 4 years of death
• Loss must be more than the lower of £1k/5% of death value

Question 4

Deed of Variation

Answer 4

• To be effective for IHT purposes:
  o Must refer to the will or intestacy being varied
  o Must be done within 2 years of death
  o Must contain a statement that the variation is to have effect for IHT purposes
  o Must be signed by all making the variation
  o Must be no consideration
• If all fulfilled original recipient not treated as making a transfer of value for IHT
• Effectively the will or intestacy is re-written

Question 5

Excluded property

Answer 5

• Pension funds, non-UK property unit trusts and OEICs, reversionary interest in a trust, gilts, life policies written under trust

Question 6

Dying Simultaneously

Answer 6

• General law presumes eldest died first

- IHT presumes died at the same time

Question 7

IHT and Transactions

Answer 7

• Charged on gifts
• Chargeable transfers - transfer of value that is not exempt
• Transfer of value is reduction in donor’s estate as a result of the transfer
• Gratuitous intent - no IHT on commercial transactions (no loss to the estate)
• Associated operations -provisions to combat IHT avoidance using a series of transactions

Question 8

Exempt (Lifetime only)

Answer 8

• Annual exemption - up to £3,000 per year/can carry forward for 1 year/only applies to lifetime gifts

- Gifts on marriage/civil partnership
o £5,000 for parents
o £2,500 for remote ancestors
o £2,500 for bride/groom to prospective spouse 
o £1,000 for any other person

• Small gifts - up to £250 to any person per tax year (can be used any number of times) – but not as part of larger gift/lifetime gifts only
• Normal expenditure - out of income, regular and part of normal expenditure/no requirement to be fixed amount

Question 9

Potentially Exempt Transfers (PETs)

Answer 9

• Lifetime transfer by an individual to:
  o Another individual
  o Bare trust
  o Disabled trust
• No tax at date of gift
• No requirement to report gift to HMRC
• If donor survives 7 years, gift becomes fully exempt
• Death within 7 years becomes chargeable
• PET valued at date of gift

Taper Relief
0 - 3 years - 100%
3 - 4 years - 80%
4 - 5 years - 60%
5 - 6 years - 40%
6 - 7 years - 20%
- Taper relief reduces the amount of tax payable, not the value of the transfer
- When PETs become retrospectively chargeable, they use up the nil rate band - this increases the tax due on the estate

• No need to inform HMRC when PET made
• Keep records as proof
• Tax due, payable by beneficiary, within 6 months of end of month when death occurred
• If CGT liable and paid by transferee, then deduct CGT paid from IHT value

Question 10

Chargeable Lifetime Transfers

Answer 10

• Not exempt or potentially exempt
• Most common is gifts into trust
• Tax charge if 7-year cumulation exceeds nil rate band
• 14-year rule – go back 7 years from CLT to establish NRB available on CLT
• 20% charge on excess over nil rate band (25% if paid by donor)
• On death tax is recalculated using value of gift and 7-year cumulation at date of transfer
• Tax at death rates will apply retrospectively to transfer
• Taper relief is available
• Credit is given for tax paid at date of lifetime transfer
• No refund will be given if too much tax was paid during lifetime
• Periodic charges every 10 years – maximum 6% of value in excess of available NRB
• Exit charge usually based on last periodic charge
• Primarily charged on transferor
• Tax due 6 months after end of month when transfer made
• If transfer made after 5th April but before 1st Oct, then tax due 30th April the following year

Question 11

Business Relief

Answer 11

For transfers of business property owned for 2 years

Non-qualifying assets - businesses wholly/mainly dealing in securities, stocks and shares or land and buildings/property subject to binding contract of sale

100% relief on interests in unincorporated businesses/ shareholdings in AIM

50% relief for controlling shareholdings in fully listed companies/land/buildings or plant/machinery wholly or mainly used in connection with company controlled by transferor

Question 12

Agricultural Relief

Answer 12

Includes agricultural land, crops and farm buildings, but not animals or equipment

Relief given on agricultural value but not any development value

100% relief for owner occupied farms

50% relief for land let under tenancies (100% relief if tenancy exceeds 12 months)
If agricultural and business relief are both available, then agricultural relief given first

Where agricultural relief and business relief are both available, agricultural relief is given first

Question 13

Woodlands Relief

Answer 13

Relief for growing timber in UK and EEA

Relief only applies to timber and not the land itself (may qualify for agricultural relief)

Relief only applies to transfers on death

Question 14

Rates 2021/22

Answer 14

£0 - £325,000 = 0%
Above £325,000 = 40%
Chargeable Lifetime Transfers = 20%
Where at least 10% of net estate is left to charity = 36%

Residence nil rate band reduced at a rate of £1 for every £2 over the 2m threshold. For example a property worth £2.1m would be restricted to £125,000 (£175,000 - (£2.1m - £2m) / 2))
- RNNB not usually available where property is left to a discretionary trust

Question 15

Cumulative Principle

Answer 15

• All chargeable transfers over 7-year period are added together
• Tax is payable once the nil rate band is exceeded
• A transfer drops out of cumulation once it is more than 7 years’ old
• Transfers over 7 years old may still be relevant for PETs within 7 years
• On death, the value of the estate is added to the value of chargeable transfer

Question 16

Quick Succession Relief

Answer 16

• If property in estate had been received by a chargeable transfer in the 5 years before death, then the tax charged on death is reduced by a percentage of IHT paid on the previous transfer

Up to 1 year = 100% relief
1 - 2 years = 80%
2 - 3 years = 60%
3 - 4 years = 40%
4 - 5 years = 20%

• Percentage only relates to the tax on the net increase in estate on the 2nd person dying

The method of calculation is as follows:

1. Calculate the tax on the estate as usual
2. A credit is then given

((Tax paid on first transfer x net transfer ) / gross transfer ) x relevant percentage

Question 17

Transfers on Death

Answer 17

• IHT is charged as if deceased made a transfer of value of estate immediately before death
• Rate is 40% of excess over nil rate band
• Reduced rate of 36% applies where 10% of net estate is left to charity
• Double benefit if leave gift in will for charity – tax exempt and may reduce tax rate

Question 18

Transfer of Nil Rate Band, Residence Nil Rate Band

Answer 18

• Unused nil rate band can be transferred to surviving spouse
• Expressed as % of nil rate band
• Transfer is claimed on 2nd death
• Upper limit of 100%
• Maximum entitlement = double nil rate band
• Main residence nil rate band came into effect April 2017
• To protect family home – available where left to direct descendant
• Now worth £175,000
• Residence nil rate band can also be transferred. Remember, it’s the unused proportionof the band from first death that’s transferred and applied to the band in place at second death (not the actual band from first death itself)
• No minimum ownership period
• Spouse has to be legally married and not a ‘common law’ husband or wife. Civil partners must be registered under the Civil Partnership Act 2004.

Question 19

Pre-Owned Asset Tax (POAT)

Answer 19

• Income tax charged on benefit of having free or low-cost enjoyment or use of certain assets formerly owned (or if provided funds to purchase)
• Annual cash value quantified and treated as addition to taxable income
• Assets include:
  o Land including living accommodation
  o Chattels
  o Intangible assets comprised on a settlement where the settlor retains an interest
• No tax charged in any year if the benefit is below £5,000
• If person pays for benefit, then this amount is deducted from the taxable cash value
• POAT applies to all disposals post 18/03/86
• Applies to UK residents
• Generally former owners will not be regarded as enjoying a taxable benefit if they retain an interest consistent with their ongoing enjoyment of the property

Avoiding POAT

• Elect for asset to be subject to IHT on death (complete form IHT 500)
• May be preferable to suffer income tax but achieve IHT saving

Question 20

IHT Planning

Answer 20

• Ensure have sufficient income and capital for own needs before making gifts
• Share assets between spouses/although can transfer unused percentage of nil rate band
• Limit of £325,000 on inter-spousal transfers if non-UK domiciled.

Potentially Exempt Transfers (PETs)

• No IHT lifetime charge on PETs over nil rate band
• Consider CGT consequences of gift
• Consider 7 year decreasing term assurance to cover liability on premature death

Chargeable Lifetime Transfers (CLTs)
- Discretionary trusts suitable where advantageous to remove asset from estate but beneficiary unknown

Business Relief and Agricultural Relief
o Relief could be lost on inter-spousal transfer
o Shares need to be held for 2 years to qualify for business relief
o 100% business relief removes incentive to make lifetime gifts of family business

IHT and Trusts
o Advantages of trust - provide cash whilst probate being obtained/Settlor can be
trustee so retains control
o Bare trust -make outright gifts so donor uses nil rate band o Discretionary trust - make gifts within nil rate band

Additional Points:
o Nil rate bands frozen at £325,000 and £175,000 until end of 2025/26
o Where at least 10% of net estate is left to charity/reduced rate of IHT (36%) applies

Question 21

Gifts with reservation

Answer 21

Examples include

• a house, but continuing to live in it without paying full market price
• a painting, but leaving it on their own sitting room wall
• a sum of money, but continuing to receive interest on it
• a freehold interest in land where the donor retains a lease and the lease was granted or acquired less than seven years before the gift

Question 22

IHT On Death estate

Answer 22

Due six months after the end of the month in which death occurs

Question 22

IHT On Death estate

Answer 22

Due six months after the end of the month in which death occurs