Chapter 4 - Inheritance Tax

Question 1

Nkasi has a set of four antique vases valued at £50,000 and she gifts one of them to her son. The value of a single vase is £10,000 and the remaining three vases are valued at £35,000. What is the loss to Nkasi’s estate for inheritance tax purposes?

a. £10,000
b. £35,000
c. £50,000
d. £15,000

Answer 1

d. £15,000

Similar example explained

Joe gives away one chair worth £1,000 in a set of twelve antique chairs worth £20,000 as a set. Breaking up the set would reduce the value of the remaining chairs to, say, £15,000.
For the purposes of IHT, the transfer of value caused by the gift of the chair is the £5,000 reduction in the value of the set of chairs, not the £1,000 value of the chair to the recipient.

Question 2

William died leaving his entire estate to his friend Sarah. The estate was worth £400,000, on which inheritance tax of £34,000 was paid.
Sarah has just died, 18 months after William, leaving an estate worth £650.000. How much quick succession relief is available?

a. £27,200
b. £34,000
c. £31,110
d. £24,888

Answer 2

d. £24,888

Quick succession relief is available where property in the deceased’s estate had passed to them by a chargeable transfer in the five years before the death. The tax charged on death is reduced by a percentage of the IHT paid on the earlier transfer.

Not more than a year = 100% relief
1 - 2 years = 80% relief
2-3 years = 60% relief
3 - 4 years = 40% relief
4 - 5 years = 20% relief

Calculation is as follows

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

(£34,000 x (£400,000-£34,000))/ £400,000

The above then x 0.8 = the quick succession relief available

Question 3

Penny and Gareth are about to get married. Penny’s mother and both of Gareth’s parents are still alive, as are both of Gareth’s grandmothers. Excluding gifts within their annual allowances, what is the maximum amount of exempt lifetime gifts that can be given by these surviving parents and grandparents on the event of their marriage for inheritance tax purposes?

a. £12,500.
b. £20,000.
c. £25,000.
d. £17,000.

Answer 3

b. £20,000.

If the donor is a parent of a party to the marriage/civil partnership = £5000

If the donor is a remoter ancestor, e.g. grandparent, of a party to the marriage/civil partnership = £2500

If the donor is a party to the marriage/civil partnership and the gift is made to the other party to the marriage/civil partnership = £2500

If the donor is any other person = £1000

(3x£5000) + (2x£2500)= £20,000

Question 4

Harriet has just gifted £350,000 into a discretionary trust for her grandchildren. This is the only gift she has made during her lifetime. How much would the immediate inheritance tax liability be, assuming it is paid by the trustees?

a. £5000
b. £10,000
c. £3800
d. £7600

Answer 4

c. £3800

• Tax is payable at 20% on the excess over the nil rate band and there will be no further IHT to pay if the donor survives for the next seven years.

The annual exemption is £3,000. This means that a transferor may make lifetime transfers exempt from IHT up to a total value of £3,000 in any one tax year. If the whole £3,000 is not used in any tax year, the balance can be carried forward to the next year.

As the client has never made a transfer she has £6000 annual allowance to use so

£350,000 - £325,000 - £6000 = £19,000

£19,000 x 0.2 = £3,800

Question 5

Anna, who has made lifetime gifts in excess of the nil rate band in the last seven years, would like to make a further gift of £50,000 into a discretionary trust. If she pays the inheritance tax herself, the loss to her estate will be

a. £62,500
b. £83,333
c. £70,000
d. £60,000

Answer 5

a. £62,500

CLTs have to be grossed up where the transferor pays the tax. If the transferor pays the tax, the estate is reduced by both the value of the asset transferred and the IHT on it.

The tax payable when transfers are grossed up is one-quarter of the excess over the nil rate band.

£50,000 over NRB so would be a transfer of £50,000 x 1.25 = £62,500

Question 6

Barry made his first ever gift of £500,000 to his son in May 2018. How much inheritance tax, if any, would be payable on the transfer if Barry, were to die in December 2023?

A. £27,040
B. £28,000
C. £70,000
D. Nil

Answer 6

A. £27,040

This is tapered relief so
0 - 3 years = 40%
3 - 4 years = 32%
4 - 5 years = 24%
5 - 6 years = 16%
6 - 7 years = 8%
7+ years = 0%

Remember the annual allowance again, as the client has never made a lifetime gift. If the whole £3,000 is not used in any tax year, the balance can be carried forward to the next year.

£500,000 - £325,000 - £6000 = £169,000

£169,000 x 16% = £27,040

Question 7

Patrick, who is UK domiciled, gifted £450,000 to his wife Astrid, who is not domiciled in the UK and has no intention of being so. How much of this gift will be exempt from inheritance tax assuming he has made no previous gifts?

A. £55,000
B. £325,000
C. £331,000
D. £450,000

Answer 7

C. £331,000

•If the transferor is domiciled in the UK but the spouse or civil partner is not, the exemption is limited to a lifetime total value of £325,000 - the same amount as the nil rate band. It is possible for a spouse who is domiciled outside the UK to elect to be treated as UK domiciled for HT purposes. Making an election avoids the cap on exempt transfers to a spouse who is domiciled overseas, but it also means that the spouse is taxed on their worldwide property rather than just property situated in the UK.

So they can transfer the nil rate band and also due to the client never gifting before she has 2 years of annual allowance built up meaning a further £6000 hence £325,000 + £6000

£331,000

Question 8

When James died recently, he was neither resident nor domiciled in the UK. His estate included a portfolio of UK Government securities.
What is the position of his portfolio for UK inheritance tax (IHT]?

a. It is liable for IHT but only if he had a UK domiciled spouse.
b. It is not liable to IHT.
c. It is liable for IHT at a reduced rate.
d. It is always liable for IHT.

Answer 8

b. It is not liable to IHT.

Government securities are not liable to IHT if the owner is not resident in the UK, regardless of domicile.

Question 9

Vasos has set-up an investment for the benefit of his grandchildren into which he makes substantial regular contributions. He funds it out of his routine outgoings and these do not impact on his standard of living. In terms of inheritance tax, this would be regarded as a[n]

a. exempt expense.
b. chargeable transfer.
c. exempt transfer.
d. potentially exempt transfer.

Answer 9

c. exempt transfer.

A lifetime transfer is exempt if:
•it was made as part of the transferor’s normal expenditure;
•it was made out of income; and
after allowing for all transfers forming part of normal expenditure, the transferor was left with sufficient income to maintain their usual standard of living.

Question 10

Lisa is married to Jake and both are UK domiciled. She had a portfolio of £250,000 shares and has just transferred 50% of her portfolio to him. 25% to her son and 25% to a local charity. For inheritance tax purposes, ignoring the annual exemption, how much is exempt?

a. £125,000
b. £187,500.
c. £250,000
d. NiL

Answer 10

b. £187,500.

Transfers between spouses and civil partners, during life and on death, are exempt. This means 50% to husband is exempt so that’s £125,000

Gifts to UK charities and major national political parties are totally exempt, with some exceptions where the gift is not outright, during life and on death. Meaning that the 25% to the charity is also exempt making a further £62,500 exempt

The 25% to the children is however not in the name of maintenance or education and so cannot be exempt.

Meaning that £187,500 is exempt across the gift to the husband and charity

Question 11

9. Oscar, an additional-rate taxpayer, having made no previous transfers, gifts £325,000 of gilts to a discretionary trust for his grandchildren and, in the same tax year, £325,000 of Real Estate Investment Trusts to an interest in possession trust for his daughter. Assuming that the trustees are to pay any tax due, what rate(s) of Inheritance Tax, if any, usually apply(ies) as an immediate result of the gifts?

A. None.
B. 20% only.
c. 40% only.
D. 20% and 40%.

Answer 11

B. 20% only.

A chargeable lifetime transfer (CLT) is one that is not exempt and not potentially exempt. The most common chargeable transfers occur on lifetime gifts to trusts other than trusts for a disabled person.

Tax is payable at 20% on the excess over the nil rate band and there will be no further IHT to pay if the donor survives for the next seven years.

Question 12

10. Dave, a divorcee, died leaving an estate valued at £250,000. The estate was subject to Inheritance Tax at 40% because

A. all his assets were held overseas.
B. the estate derived from assets subject to Business Asset Rollover Relief.
C. his nil rate band had been transferred to his ex-wife.
D. of previous transfers.

Answer 12

D. of previous transfers

Previous transfers must have exceeded the nil rate band

Question 13

3. Javid has used all his Inheritance Tax (IHT) annual exemption for the current and previous tax year and decides to make the following additional gifts in this tax year:

(i £10,000 to his granddaughter on her marriage
(ii) £4,000 to his grandson on his 1gth birthday out of normal expenditure
(iii) £3,000 split equally between four friends
(iv) £75,000 to a UK charity
How much of Javid’s gifts would be liable to IHT if he were to die within 7 years?

A £2,000
B £8,500
C £9,500
D £13,000

Answer 13

C £9,500

As a grand parent the client can give £2500 gift to the grandchild, this makes £7500 taxable

Anything out of normal expenditure is not a taxable amount on IHT

Every individual gets a £250 gifting allowance to give to anyone, this can be to as many individuals as they want. £3000 split equally between 4 friends would equate to £1000 gifting allowance exemption with the rest of the £2000 being taxable

Charitable donations are tax exempt

£7500 + £2000

Question 14

6. Marisa died on 30 July 2023 leaving an estate of £900,000 which did not include any residential property. She left £60,000 to a UK charity and the remainder to be split equally between her husband and her daughter. If she has not made any lifetime gifts, how much inheritance tax must her executors pay?

A £32,040
В £34,200
C £35,600
D £38,000

Answer 14

В £34,200

£60k charity donation is tax free, this then being split to the husband and child. Any transfer between spouses are IHT free so £420k is then tax free too.

As the client has no property they only get the NRB to use of £325k, so of the £420k to the daughter £325k is exempt. Leaving £95k taxable

The charitable legacies rule applies to net estates, this means the estate once IHT and any other allowances have been taken BUT NOT THE DONATIONS ITSELF. So In this case they are donating £60k of £575k which is above 10%. This means they get a reduced IHT rate of 36%.

The remaining £95k is taxed at 36% = £34200

Question 15

Joseph has been asked to be a trustee of a trust where there is no interest in possession. He has asked you what the implications of this are. You can tell him that (Tick all that apply)

A. these trusts are usually known as bare trusts.
B. there is no requirement for him to pay income to any particular beneficiary.
C. a transfer into this type of trust is a potentially exempt transfer.
D. if a beneficiary dies, there is no charge to IHT on their estate

Answer 15

B. there is no requirement for him to pay income to any particular beneficiary.
D. if a beneficiary dies, there is no charge to IHT on their estate

Where no one has an interest in possession there is no requirement for trust income to be paid to any particular beneficiary. If a beneficiary such a trust dies, there is no charge to IHT on their estate because they do not have an interest in possession and are therefore not deemed to own the underlying capital. - Chapter 4, Sections H5/H5A,
Learning Outcome 3.1
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Sally rents a room in her home

Question 16

Ben has recently died having run his landscape gardening business as a sole trader for 15 years. He has left the business with a value of £500,000 to his son Charlie. What is Charlie’s IHT taxable amount regarding the Inheritance Tax position of Ben’s business?

Answer 16

Correct. 100% business relief is available to sole traders, providing the business has been owned for two years. - Chapter 4, Section C1A, Learning Outcome 1.4

Question 17

Gail has set up a discretionary trust for her grandchildren for £400,000. Assuming she has a full nil rate band available and has NOT made any previous transfers, how much IHT will be payable assuming the trustees pay the tax?
A. £30,000
B. £15,000
C. £14,400
D. £13,800

Answer 17

D. £13,800

With this type of question, candidates must remember the annual allowance. The question will always indicate whether this can be deducted or not. In this question, we are told that Gail has not made any previous transfers, so we can use it in this calculation.
The other piece of important information is that the trustees will pay the tax; this is important because if we had been told the settlor would pay, then the answer would have been different.
Where the trustees pay the tax due on a chargeable lifetime transfer, the charge is 20% of the excess over the nil rate band. First, though, we deduct the two annual exemptions (remember the one from the previous year can be carried forward), so from E400,000, we can deduct £6,000 leaving us with £394,000. From this figure, we deduct the nil rate band of £325,000 leaving us with £69,000. This figure is then multiplied by 20% (as the trustees are paying), which gives us the answer of D, £13,800.
You should note that if the question states that the settlor was paying the tax, then the transfer must be grossed up, and the answer multiplied by 20%.
More simply, we can use 25% instead of 20%, which gives the same result as follows:
£69,000 grossed L
by 20% = £86,250 x 20% = £17,250
£69,000x25% = £17,250

Question 18

On Alan’s death, he left an estate valued at £875,000. This included a main residence worth £350,000 and AIM shares valued at £200,000 that he had owned for over five years. In his will, Alan left £50,000 to the British Heart Foundation. The remainder of his estate was divided equally between his two daughters. Alan had never been married and had made no lifetime gifts. What is the amount of IHT payable on Alan’s estate?

Answer 18

£45,000

Incorrect. Alan’s chargeable estate is £875,000 less the exempt gift to charity of £50,000 = £825,000. £200,000 AIM shares receive 100% business relief as they have been held for over 2 years. £325,000 is exempt under the nil rate band.
E175,000 is exempt under the residence nil rate band.
The net estate for establishing whether the 36% rate applies is £875,000 - £200,000 (AIM shares) - £325,000 (NRB) = £350,000. The 10% threshold is therefore £35,000. As the charitable bequest is £50,000, the 36% rate applies to the remaining estate of £875,000 - £50,000 - £200,000 - £325,000 - £175,000 = £125,000 @ 36% = £45,000. Chapter 12, Section ASD, Learning Outcome 4.1

Question 19

Tamsin makes a transfer of £ 150,000 to a discretionary trust and 4 years later made a PET of £325,000. She dies 6 ½ years later. All other gifts were covered by the annual allowance. Assuming she had used her annual exemptions elsewhere what is the Inheritance Tax liability?

Answer 19

£12,000

Although the transfer into the discretionary trust took place more than 7 years before Tamsin died, it was within 7 years of the PET so we still need to deduct its value from the nil rate band that can be used against the PET. £325,000 - £150,000 = £175,000. Deduct £175,000 from the PET of £325,000, leaving £150,000 chargeable to IHT at 40%.

£150,000 @ 40% = £60,000. As the PET was made between 6 and 7 years of death, taper relief applies and only 20% of the amount due is payable. £60,000 @ 20% = £12,000. - Chapter 4,
Section B2E, Learning Outcome 4.1

Question 20

Who is the creation of a trust taxed

Answer 20

As a PLT is applicable or CLT if applicable I.e a bare trust is a PLT and a discretionary is a CLT

Question 21

Ms Reid made the following gifts:

September 2018 £40,000 to her daughter
October 2019 £20,000 to her granddaughter
June 2023 £2,000 to her niece

No other gifts have been made in her lifetime.

She dies in March 2024, leaving arlestate of £460,000 to her daughter. Included in this is the family home worth £200,000. Ms Reid has never married.

Calculate, showing all your workings, the inheritance tax liability on her estate.

Answer 21

This question tests the use of annual exemption mostly

£40k can use £6k annual exemption
£20k can use £3k annual exemption
£2k also uses £3k annual exemption

This results in total previous transfers of £51k, this is added to her total estate at death leaving a total estate of £511,000

Because of the RNRB they get £500k tax free

Meaning £11k is taxed at 40%

Resulting in £4,400 tax

Question 22

Paul Owen died in May 2022 and left his estate, valued at £400,000, to his friend Mark Harvey. The tax paid on Paul’s estate was £40,000. Mark then died in February 2024, leaving an estate worth £650,000 to his nephew. Calculate, showing all your workings, the inheritance tax liability on Mark’s estate.

Answer 22

Quick succession relief calculation

(£40k x(£400k-£40k))/£400k = £36k

£36k x quick succession relief factor of 0.8 due to being dead for 1-2 years

Relief of £28,800

As this is a relief it’s taken from the final tax amount figure at the end.

£650,000 - NRB = £325,000

£325,000 x 40% = £130,000

£130,000 - £28,800 = £101,200

Question 23

Mr Jones made the following gifts:

• August 2016 £150,000 to his son

• June 2018 £150,000 to his daughter

• October 2020 £90,000 to his brother and £72,000 to his sister

• July 2021 £150,000 to a Discretionary Trust for his grandchildren

No other gifts have been made in his lifetime. He then dies in November 2023.

Calculate, showing all your workings, his inheritance tax liability on the gifts he has made.

Answer 23

£48,800

First things to note, the first transfer was more than 7 years ago so this is now tax free

The most recent transfer is not a PET it’s a CLT, Chargeable lifetime transfers result in an immediate tax charge if they, along with any other chargeable lifetime transfers in the previous 7 years’ cumulative total, exceed the available nil rate band

Each of the transfers can use their current and previous years annual exemption so £6k deductible from each apart from the last gift which can only use its current year.

So here’s the following

£144,000 + £87,000 + £69,000 + £ £147,000 - £325,000 = £122,000

£122,000 x 0.4 = £48,800

Question 24

Shelagh passed away on 1 January 2024. As a farmer, her estate included:

• agricultural land valued at £200,000, but with a development value of £500,000;
• a farmhouse, which had been occupied by Shelagh for over twenty years up to her death with an agricultural value of £250,000, but an open market value of £400,000;
• and farm equipment valued at £50,000.

How much agricultural relief can Shelagh’s legal personal representatives claim against her estate?

Answer 24

Answer

£450,000

Detailed explanation

Agricultural relief at 100% can be given on the agricultural value of the land and farmhouse. £200,000 + £250,000 = £450,000. This is because Shelagh has owned and occupied for farm for over 2 years at the date of her death.

It is not available on the development value of the land or farmhouse, nor on the farm equipment.

However, assuming Shelagh ran her farm as a trade, 100% business relief may be available instead.

CII R03 Study Text Chapter 4, Section C2

Question 25

Anna is the trustee of an Accumulation and Maintenance (A&M) trust set up in 2005, the terms of which have not been changed in any way. Anna should be aware that if capital passes to the beneficiary (Tick all that apply.)

A. after age 25, it is treated as a relevant property trust with periodic and exit charges being payable after their 18th birthday.
B. after age 25, it is treated as a relevant property trust with periodic and exit charges being payable after 5 April 2008.
C. on or before age 25, there is an exit charge based on the length of time since the last periodic charge
D. on or before age 25, there is an exit charge based on the length of time since their 18th birthday.

Answer 25

B. after age 25, it is treated as a relevant property trust with periodic and exit charges being payable after 5 April 2008.

D. on or before age 25, there is an exit charge based on the length of time since their 18th birthday.

Where an A&M trust has not been varied, then if capital passes to the beneficiary after age 25, it is treated as a relevant property trust with periodic and exit charges being payable after 5 April 2008. If capital passes to the beneficiary on or before age 25, there is an exit charge based on the length of time since their 18th birthday, but no periodic charges apply. - Chapter 4, Section H7 , Learning Outcome 3.1