Chapter 4: Inheritance Tax Flashcards

Question

Summary

Answer 1

IHT is a tax that is primarily paid on the estate of a deceased person at a rate of 40% but there are also lifetime trigger events. A PET is a lifetime gift to another individual. It is exempt unless the transferor dies within 7 years, in which case it is charged at the death rate of 40%. An LCT is a lifetime gift into a trust. It is an immediately chargeable transfer. An LCT is taxed at the lifetime rate of 20% but reassessed and charged at the death rate if the transferor dies within 7 years.

Answer 2

There is a nil rate band of £325,000. Individuals also have an additional nil rate band if they dispose of their family home to direct descendants. The unused portions of both nil rate bands are transferable to the deceased’s surviving spouse. When calculating IHT it is necessary to take into account the cumulative total of chargeable transfers made in the last 7 years to determine the value of the NRB. Exemptions and reliefs may be available to reduce an IHT liability.

Answer 3

All individuals have a nil rate band (‘NRB’) for IHT purposes. The basic nil rate band is £325,000. This means that the first £325,000 of a transfer subject to IHT is taxed at 0%. An individual’s surviving spouse or civil partner can inherit the unused portion of their basic NRB. This is known as the ‘transferable nil rate band’ (‘TNRB’).

Answer 4

There is an additional nil rate band (currently £175,000) for individuals who leave their family home to direct descendants. This is known as the ‘residence nil rate band’ (‘RNRB’). The RNRB can also be transferred to an individual’s surviving spouse or civil partner. In this element we cover the NRB, TNRB and RNRB in more detail. We also look at the concept of cumulation.

Answer 5

Cumulation is used to prevent individuals reducing or avoiding an IHT liability by making a series of separate dispositions. Instead of viewing each chargeable transfer (i.e. failed PET, LCT, death) in isolation, HMRC consider other chargeable transfers made in the 7 years prior to the transfer being taxed. The combined value of these transfer is called the cumulative total.

Answer 6

The effect of the cumulative total is to reduce the NRB available for the transfer under consideration. It is therefore necessary to calculate the ‘cumulative total’ on the relevant date to determine the NRB amount for a particular transfer.

Answer 7

A man died last month having made two lifetime gifts within the last seven years. · Last year he gifted cash with a chargeable value of £50,000 (a PET). · Two years ago he gifted shares with a chargeable value of £100,000 (a PET). As these PETs were made in the 7 years prior to the man’s death they have failed and are chargeable transfers. His cumulative total on death is £150,000. His NRB is reduced accordingly (£325,000 - £150,000). The NRB available on death is £175,000. Please note that this is a simplified example which doesn’t consider the availability of exemptions or reliefs.

Answer 8

Before 9 October 2007 the basic NRB would be wasted when a deceased passed their estate entirely to their surviving spouse (because spouse exemption applied to so there was no use for the NRB). Individuals would often try to make the most of both NRBs by leaving a portion of their estate to other family members or setting up trusts known as ‘nil rate band trusts’. These are discretionary trusts which cover the amount of the NRB and include the surviving spouse as a potential beneficiary. This allows them to benefit without the trust property forming part of their estate for IHT purposes.

Answer 9

Where one spouse held the bulk of the couple’s assets, they would often be advised to try and equalize their estates, to ensure both had enough assets to make the most of their own NRB. Such tax planning tends only to be useful for wealthier individuals. In any case, it has become less common since the introduction of the TNRB in the Finance Act 2008. The TNRB allows a surviving spouse to take advantage of the unused portion of the deceased’s basic NRB.

Answer 10

If a married individual dies and some or all of their NRB remains unused, the PRs of the surviving spouse can claim an increase in the survivor’s NRB equal to the unused percentage of the first spouse’s NRB - the TNRB. The amount of the TNRB is equal to a % of the NRB sum on the date the survivor dies. It is not simply the unused amount carried forwards. This operates in favour of the taxpayer because the estate of the surviving spouse will benefit from any increase in the NRB threshold which occurs after the first death. For example, if the NRB was £312,000 when the first spouse died but had increased to £325,000 by the time the second spouse died, the amount of the TNRB would be calculated with reference to £325,000 not the lower figure of £312,000. Therefore, if the first spouse to die had used 50% of their NRB, when the second spouse died the transferable amount is £162,500. NB: if the NRB amount has not changed between the date of the first and second death, the unused amount and unused % will be the same.

Answer 11

The TNRB is only available after the surviving spouse dies. Therefore, it cannot be claimed in respect of a chargeable lifetime transfer when it is made by the survivor. The date of the first spouse’s death doesn’t matter i.e. it can pre-date the introduction of the TNRB. The TNRB can apply provided the survivor’s death occurred after the introduction of the TNRB.

Answer 12

Individuals who have survived more than one spouse can claim the TNRB in respect of all of them, subject to a cap of 100% of a full nil rate band being transferred. Individuals who would be entitled to claim a TNRB with regards a previous marriage/civil partnership can also pass this on to any subsequent spouse they have (again capped at 100% of a full NRB). On the next page, we consider examples involving multiple marriages in more detail.

Answer 13

· A and B were married. B later died. Following B’s death, 20% of his NRB was used (leaving 80% unused). · A then married C. C later died. Following C’s death, 50% of his NRB was used (leaving 50% unused). · A has just died. A’s PRs can claim a TNRB from both B and C (80% from B and 50% from C). However, the total is capped at 100% (one full NRB of £325,000). A’s PRs can claim A’s own NRB plus 100% TNRB (from B/C), thus increasing A’s NRB from £325,000 to £650,000.

Answer 14

· D and E were married. E later died. Following E’s death, 90% of her NRB was used (leaving 10% unused). · D then married F. F died later. Following F’s death, 70% of her NRB was used (leaving 30% unused). · D has just died. D’s PRs can claim a TNRB from both E and F (10% from E and 30% from F). D’s PRs can claim D’s own NRB plus 40% TNRB (from E and F), thus increasing A’s NRB from £325,000 to £455,000 (£325,000 + £130,000 (40% of £325k)).

Answer 15

· A died 15 years ago, survived by wife, B. A left all assets to B, meaning A’s NRB was unused. · B married C five years ago. · B died two years ago, leaving her entire estate to the children from her first marriage. 50% of her NRB remained unused. B’s PRs didn’t need to claim TNRB from A because B didn’t use her whole NRB.

Answer 16

C died recently, leaving his estate (worth £700,000) to his siblings. He has a full NRB available. C’s NRB doesn’t cover the full value of his estate. His PRs will therefore want to claim the TNRB from B’s estate. B’s total available NRB included B’s own NRB (of which 50% remained unused) and A’s full NRB, to which B’s estate was entitled but did not claim (worth £325,000). The claim by C’s PRs for a TNRB will be capped at one full NRB. C’s PRs can increase C’s NRB to £650,000, but no more, even though B’s total ‘available but unused’ NRB would be worth more than £325,000.

Answer 17

No claim needs to be made when the first spouse dies. The PRs of the surviving spouse must make a claim for the TNRB in the IHT return within two years of the end of the month of death (or within three months of the PRs first acting, if this is later). If they fail to do so, anyone else who is liable to pay the IHT on the surviving spouse’s death can make the claim after the deadline for the PRs to claim has passed. HMRC has discretion to extend the deadline.

Answer 18

If an individual survives more than one spouse, a separate claim must be made for each TNRB. It is advisable to do this even though the cap means that only one TNRB might actually be needed (in case there is an error discovered in the IHT returns of any of the deceased spouses). The PRs of a surviving spouse can also make a claim for any TNRB the deceased spouse was entitled to on the death of a previous spouse (if their own PRs had not made such a claim already).

Answer 19

The RNRB was introduced by the Finance (No 2) Act 2015. It provides an additional nil rate band where the following conditions are satisfied: · The deceased died on or after 6 April 2017 · Their death estate included a ‘qualifying residential interest’ (‘QRI’) · The QRI was ‘closely inherited’ by a ‘direct descendent’ If part of the QRI is closely inherited but the other part is not, only the chargeable value of the share which is closely inherited is taken into account when calculating the value of the RNRB.

Answer 20

The amount of a full RNRB is £175,000. If the deceased’s share or interest in the property (after the deduction of any mortgage on the property) is worth less than £175,000, the RNRB amount is capped at the value of the property. Where the RNRB is claimed it is applied to the death estate as a whole rather than set-off against the gift of the property separately.

Answer 21

There is a tapered withdrawal of the RNRB for estates with a net value (here this means the value of the assets which comprise the taxable estate, after debts have been deducted, but before exemptions and reliefs are applied) of more than £2 million. The reduction in the RNRB is £1 for every £2 above the £2 million threshold. There is no RNRB available at all for net estates worth £2,350,000 or more (or £2,700,000 where a full transferred RNRB applies).

Answer 22

A QRI is a residential property interest which is part of the deceased’s estate immediately before death. Where the deceased had more than one residential property interest in their estate at death, the PRs must nominate one of them as their QRI. A residential property interest is an interest in a dwelling-house which the deceased occupied as their residence at some point during their period of ownership.

Answer 23

It includes property in which the deceased did not live (because they were living in other job-related accommodation) but intended to do so in in due course. It does not include rental investment properties in which the deceased never lived. A dwelling-house can include the garden/grounds (if the land is not subject to a woodlands relief election).

Answer 24

A QRI must be ‘closely inherited’. A beneficiary closely inherits from the deceased if they receive the QRI by: · gift under the will - either as a specific legacy of the deceased’s home, or by taking a whole or part share of the residue which includes such property · operation of the law of intestacy · operation of the rules of survivorship

Answer 25

There are other circumstances in which a person will ‘closely inherit’ from a deceased e.g. where there are gifts into certain types of trust, or where the deceased has received a GROB, but these rules are beyond the scope of the module. Unless a specific exception applies, a beneficiary with a contingent interest following death does not ‘closely inherit’ for these purposes as they are not receiving an absolute interest e.g. it would not apply to a gift to a grandchild who was aged 15 if the gift was contingent on their reaching 25.

Answer 26

A QRI must be ‘closely inherited’ by one or more direct descendants. The following are included as direct descendants of a deceased person (s 8K IHTA 1984) 1) The deceased’s children, grandchildren, great-grandchildren and other lineal descendants, 2) Spouse or civil partner of anyone included in 1) above, 3) Widow, widower or surviving civil partner of anyone included in 1) above who has pre-deceased the deceased, provided the survivor does not re-marry or enter a new civil partnership before the deceased dies.

Answer 27

When considering 1) above: adopted children, step-children (if their parent was married to the deceased), foster children and children for whom the deceased was a guardian or special guardian are included. The deceased’s siblings, parents, nieces, nephews are not direct descendants.

Answer 28

A man died this year, leaving his entire estate (worth £500,000) to his children. He has a full basic NRB available. The estate includes the family home (worth £250,000). Without the RNRB, the estate would not all be covered by the NRB.

Answer 29

The family home is a QRI and the man’s children are direct descendants. The conditions for using the RNRB are therefore met. As the family home is worth more than the RNRB, the full amount of the RNRB is available. The man therefore can use both his NRB of £325,000 and RNRB of £175,000. Together they cover the value of the man’s estate. There is therefore no IHT to pay on the man’s estate.

Answer 30

It is also possible to transfer any unused RNRB to a surviving spouse. The transfer of the RNRB is relevant when the survivor of a married couple dies and their pre-deceased spouse did not use their own RNRB. This may arise where the first of the couple to die:

Answer 31

· did not own a QRI e.g. they did not own a residential property; or · they did not qualify for the RNRB because they left a QRI to someone who was not a lineal descendant e.g. they left their entire estate to the surviving spouse.

Answer 32

Note that providing the survivor dies after April 2017 they will be able to claim a transferred RNRB even if their pre-deceasing souse died before this date. A transferred RNRB can only be used if the surviving spouse leaves a QRI to a direct descendant (i.e. conditions for the RNRB must be met on the second death).

Answer 33

The home that the surviving spouse leaves to their direct descendants does not have to be the same house that they lived in with their deceased spouse(s) (the deceased spouse does not need to have owned any QRI). Transferring the RNRB works in the same way as transferring the basic NRB, allowing the surviving spouse to increase the value of their RNRB by up to 100% (based on the percentage remaining of the deceased spouse’s RNRB). Where a full transfer occurs, an estate may qualify for a RNRB of £350,000 (£175,000 + £175,000).

Answer 34

The tapered withdrawal of the RNRB for net estates worth more than £2 million applies with reference to the total RNRB. Where the survivor’s estate could claim £350,000 RNRB this amount is reduced by £1 for every £2 in excess of £2m, and no RNRB can be claimed for net estates worth £2,700,000 or more.

Answer 35

A died five years ago, leaving her entire estate to civil partner, B. B died this year, leaving her estate to daughter, C. The estate includes the family home (worth £350,000). B’s PRs can make a claim for the unused RNRB from A’s estate. The total RNRB available for B’s death estate is £350,000 (B’s own RNRB of £175,000 plus an additional 100% uplift in respect of A’s RNRB). Where the RNRB is claimed it is applied to the death estate as a whole, rather than set-off against the gift of the QRI separately.

Answer 36

You should be aware of rules which allow an estate to qualify for a full RNRB even if the deceased did not own a QRI when they died (or the value of their QRI is less than the RNRB). These rules are referred to as the “downsizing” rules and the additional amount of the RNRB referred to as the downsizing addition. Broadly, to qualify: the deceased must have given away their QRI or downsized to a less valuable QRI on or after July 2015 (i.e. have lost the benefit of the full RNRB) the former home would have been a QRI if it had been retained

Answer 37

a direct descendant inherits the replacement QRI and/or other assets The amount of the addition is calculated with reference to the amount of the RNRB which would otherwise be lost because the former QRI is no longer owned (or a less valuable QRI has taken its place). A claim for the downsizing addition is made by the PRs within 2 years of the end of the month of death, not when the sale/gift of the former home takes place. However, details of the lifetime sale/gift will be needed by the PRs to bring the claim.

Answer 38

The downsizing addition is only relevant if there is no QRI in the estate when the deceased died (but there was historically), or the value of the new QRI following a downsizing move is less than the current maximum RNRB. The downsizing rules are not relevant if: · there is no loss of the RNRB because the value of any new QRI in the estate is the same/more than the maximum available RNRB, or, · the RNRB is not available, because the new QRI or assets are not left to a direct descendant Application of the rules is complex and beyond the scope of this module but will never produce a total RNRB greater than the maximum otherwise normally available.

Answer 39

It is possible for a person’s estate to qualify for a total NRB amount of £1million. Consider the following: · A and B are married. A dies leaving all of their estate to B. A made no lifetime gifts. · On A’s death no NRB is used because the whole of A’s estate passes to their spouse and is spouse exempt. · B then dies leaving the whole of their estate to their children. B made no lifetime gifts. · B’s estate is worth £1million and includes a family home worth £500,000.

Answer 40

When B dies, B’s PRs can claim: · B basic NRB of £325,000 · B’s RNRB of £175,000 (the house passes to a direct descendent) · A’s unused basic NRB of £325,000 (TNRB) · A’s unused RNRB of £175,000 (transferred RNRB) This gives a total combined NRB of £1 million (£325,000 + £325,000 + £175,000 + £175,000). No IHT is payable on B’s death.

Answer 41

· Each individual is entitled to a basic nil rate band of £325,000 (‘NRB’). Chargeable transfers up to the value of the NRB are taxed at 0%. · The NRB available is reduced by a person’s cumulative total. The cumulative total = total value of the chargeable transfers made in the previous 7 years. · The PRs of a surviving spouse/civil partner can claim the unused % of the NRB of the pre-deceased spouse/civil partner (the transferred NRB (‘TNRB’)). The TNRB is capped at 100% of the basic NRB at the date of the survivor’s death.

Answer 42

· On death, an additional nil rate band of £175,000 can be claimed if the deceased left a ‘QRI’ to a direct descendant, referred to as the ‘residence nil rate band’ (‘RNRB’). There is a tapered reduction in the RNRB for estates worth more than £2 million. · The PRs of a surviving spouse/civil partner can claim the unused % of the RNRB of the former spouse/civil partner (the transferred RNRB). The transferred RNRB is capped at 100% of the amount of the RNRB at the date of the survivor’s death. · Estates without a QRI (or a QRI worth less than the maximum RNRB) might benefit from the downsizing rules.

Answer 43

In this element we look at the full process of calculating the inheritance tax (‘IHT’) due on lifetime transfers. There are two separate calculations that may be required: The tax due on an immediately chargeable lifetime transfer (LCTs only).The tax due as a result of the transferor dying within seven years of making a lifetime transfer (LCTs and failed PETs). You will need a calculator to follow the examples in this element.

Answer 44

A PET is a lifetime transfer of value to another individual. If the individual doesn’t survive for seven years after making the transfer, it becomes chargeable alongside their death estate. The rationale behind PETs is to prevent individuals avoiding IHT by giving away property shortly before their death. The tax treatment of a PET is as follows:

Answer 45

* The transfer is not chargeable at the point it is made. No IHT is payable yet. * It becomes fully exempt if the transferor survives seven years from the date of the PET. * If the transferor dies within seven years of making the PET, the PET ‘fails’ and becomes a chargeable transfer and thus subject to IHT.

Answer 46

All lifetime transfers of value made by a person into a trust on or after 22 March 2006 will give rise to an LCT. The tax treatment is as follows: * An LCT is a chargeable transfer when it is made. IHT is payable on the chargeable value of the LCT at the lifetime rate of 20%. * If the transferor survives 7 years following the LCT there is no further charge to tax. * If the transferor dies within 7 years, the LCT will be reassessed to tax at the death rate, using the NRB at the date of death. Practice Alert: There are different rules for trusts set up for disabled people provided that statutory requirements are met. These rules are outside the scope of this module.

Answer 47

The following formula should be used when calculating IHT on lifetime transfers: Step A Calculate cumulative total Step B Identify value transferred Step C Apply exemptions and reliefs Step E Apply taper relief Step F Give credit for tax paid in lifetime Note that Steps E and F only apply when the IHT is being calculated after death.

Answer 48

Step A: Calculate cumulative total The cumulative total is relevant to lifetime transfers as it tells us how much of the nil rate band (‘NRB’) is available for the transfer. The cumulative total is calculated by adding up the value of all chargeable transfers made in the 7 years prior to the transfer. Although cumulation only takes into account chargeable transfers made in a 7 year period, where an LCT or PET is reassessed, this can mean looking back as far as 14 years before the transferor’s death. For example, if an LCT was made 7 years before the transferor’s death, it will be reassessed to tax at the death rate when the testator dies. It is then necessary to calculate the cumulative total for the LCT based on the 7 years prior to the LCT (i.e. the 7 year period starting 14 years before the death)

Answer 49

A man makes the following transfers: * 10 years before death: An LCT (chargeable value £4,000) * 6 years before death: PET 1 (chargeable value £50,000) * 2 years before death: PET 2 (chargeable value £10,000) Both PETs have failed, making them chargeable. The LCT is also a chargeable transfer. It is not reassessed (it was made more than 7 years before death) but is relevant to the cumulative total.

Answer 50

* The cumulative total applicable when calculating the IHT due on PET 1 is £4,000 (as the LCT was made 4 years before PET 1). * The cumulative total applicable when calculating the IHT due on PET 2 is £50,000 (as PET 1 failed, has become chargeable and was made 4 years before PET 2. NB: the LCT is not considered as it was made more than 7 years before PET 2). * The cumulative total applicable when calculating the IHT due on the death estate is £60,000 (as both PETs have failed).

Answer 51

A ‘transfer of value’ is a ‘disposition’ which results in an immediate decrease in the value of the individual’s estate (s 3(1) IHTA). Broadly, this means gifts but it can also include transactions at an undervalue (e.g. selling your house to a family member for less than it is worth – the difference in value counts as a gift). It applies to gifts of all forms of property (i.e. anything with a monetary value). Forlifetime transfers, the value of a transfer is assessed by reference to the loss in value to the donor at the date of the transfer.

Answer 52

It is then necessary to apply any available exemptions or reliefs. For the purposes of this module the exemptions and reliefs that you may be required to apply when calculating IHT on lifetime transfers are: * Spouse exemption * Charity exemption * Family maintenance exemption * Annual exemption * Small gifts allowance * Normal expenditure from income * Marriage exemption * Business property relief * Agricultural property relief * Taper relief (applies at Step E)

Answer 53

After applying all relevant exemptions and reliefs you will reach a figure for the chargeable value of the transfer. There are a lot more exemptions and reliefs available for lifetime transfers than for the death estate, so make sure you make use of them in the most efficient way. A man makes a wedding gift of £12,000 to his daughter. He has made no other gifts in the last two years.

Answer 54

- Marriage exemption: £5,000 - Current Annual Exemption (‘AE’): £3,000 - Last year’s AE: £3,000 Deduct total value of exemptions from value of gift to reach chargeable value: £12,000 - £11,000 = £1,000

Answer 55

Once you have established the chargeable value of the transfer, the basic NRB can be applied against the remaining taxable value. Establish the value of the NRB. Reduce the total NRB by the value of the cumulative total (from Step A). Apply a rate of 0% to the value of the remaining taxable estate up to the total NRB amount. Apply the relevant rate to the rest to establish the IHT due.

Answer 56

* The residence NRB never applies to lifetime transfers. * The NRB applicable to an LCT when it is first made is the NRB at the date of the transfer. * The NRB that applies to a failed PET or re-assessed LCTis the NRB at the date of death. As the NRB has been fixed at £325,000 since April 2009, this is the figure you should use unless a question tells you otherwise.

Answer 57

After deducting the NRB, it is necessary to apply IHT to the remaining amount at the appropriate rate. This rate will differ depending on whether you are dealing with the tax due immediately on an LCT or are re-assessing a lifetime transfer (LCT or PET) because the transferor has died within seven years. LCTs: When calculating the tax due immediately on an LCT, the tax is payable at the lifetime rate of 20%. Step D is the final step in the calculation. Failed PETs and re-assessed LCTs: Tax is payable at the death rate of 40%. If the transferor dies 3-7 years after making the transfer, it is also necessary to apply taper relief at the relevant rate to reduce the IHT payable.

Answer 58

A man settles £400,000 on trust for his grandchildren (an LCT). He made one PET (£50,000) three years before the LCT.

Answer 59

Step A: Calculate cumulative total £0 (as the earlier PET has not yet failed) Step B: Identify value transferred £400,000 Step C: Apply exemptions and reliefs AE for year of LCT: £3,000 AE for previous year: £3,000 Chargeable value: £400,000 - £6,000 = £394,000

Answer 60

Step D: Apply basic NRB and calculate tax Nil rate: £325,000 Lifetime rate: (£394,000 – £325,000) = £69,000 £69,000 @ 20% = £13,800 Steps E and F: Reassessed transfers PETs or LCTs made in the 7 years before death must be reassessed to IHT. This is separate to the calculation of IHT on the death estate. Although death is the trigger for the lifetime transfer being reassessed, these transfers do not form part of the death estate. The tax payable on a failed PET or reassessed LCT must be calculated separately. If a PET or LCT is being reassessed it is necessary to consider Step E of the calculation (which involves applying taper relief to transfers made 3-7 years before the death) If tax was paid on an LCT during the transferor’s lifetime and it is later reassessed at the death rate, it may also be necessary to consider Step F (which involves giving credit for tax paid in the transferor’s lifetime).

Answer 61

Step E: Taper relief The rates of taper relief are set out below. You will see these rates expressed either as a % reduction in the amount of IHT due, or confirmation of the % that remains payable. Both produce the same outcome. Step F: Giving credit for tax paid in lifetime Where an LCT is being reassessed at the death rate, it is also necessary to factor in any tax that was paid at the lifetime rate. This is done by deducting the IHT paid previously from that due as a result of the death (after taper relief has been applied). Only the balance needs to be paid to HMRC. If the balance is reduced to nil as a result of crediting the previous payment, there will be no further tax to pay. It is not possible to obtain a refund for the lifetime payment if the balance is negative.

Answer 62

A man settles £400,000 on trust for his grandchildren (an LCT). Tax of £13,800 was paid on the LCT during the man’s lifetime. He made one PET (chargeable value £50,000) three years before the LCT. He dies three years after the LCT. He has made no other transfers.

Answer 63

Step A: Calculate cumulative total £50,000 (because PET has failed) Step B: Identify value transferred £400,000 Step C: Apply exemptions and reliefs AE (£3,000) x 2 = £6,000 Chargeable value: £400,000 - £6,000 = £394,000

Answer 64

Step D: Apply basic NRB and calculate tax Nil rate: (£325,000 - £50,000) = £275,000 @ 0% Death rate: (£394,000 – £275,000) = £119,000 £119,000 @ 40% = £47,600 Step E: Apply taper relief LCT 3 years ago. 80% of £47,600 = £38,080 Step F: Give credit for tax paid in lifetime £38,080 - £13,800 = £24,280

Answer 65

If IHT is payable as a result of a lifetime transfer and the transferor pays the tax (in addition to the gift itself), the reduction in the value of his estate includes the amount of IHT paid as well as the gift itself. The value of the gift must be ‘grossed up’ to find the total value transferred before the tax due is calculated. Grossing up is outside of the scope of the module but it is something to be aware of if you encounter IHT (or indeed other taxes) in practice.

Answer 66

· LCTs are lifetime transfers into a trust. PETs are lifetime transfers to an individual. · LCTs are immediately chargeable to IHT at a rate of 20%. Use the following process to calculate the tax due: A. Calculate the cumulative total B. Identify the value transferred C. Apply exemptions and reliefs D. Apply basic NRB and calculate tax at the appropriate rate

Answer 67

If the transferor dies within 7 years, the LCT must be reassessed, using the same 4 steps (but applying a tax rate of 40% at Step D). It is then necessary to apply taper relief (Step E) at the appropriate rate and apply credit for any tax paid during the transferor’s lifetime (Step F). (Credit is given for any tax paid in their lifetime but no refund is given if the tax due on death is less than that already paid at the lifetime rate). · PETs are not chargeable unless the transferor dies within 7 years, in which case they are reassessed at the death rate of 40%. Follow Steps A to E to calculate the tax due.

Answer 68

In this element we look at the full process of calculating the inheritance tax (“IHT”) due when someone has died. It can be quite a complicated calculation, depending on the size and nature of the estate, as well as how the deceased dealt with their assets during their lifetime. You should follow the seven step process below to help you break down the calculation and effectively work out the IHT due.

Answer 69

Step 1 Calculate cumulative total Step 2 Identify assets included in the taxable estate Step 3 Value the taxable estate Step 4 Deduct debts/expenses Step 5 Apply exemptions & reliefs Step 6 Apply RNRB Step 7 Apply basic NRB and calculate tax

Answer 70

The cumulative total is relevant to the death estate as it tells us how much of the nil rate band (‘NRB’) is available. The cumulative total is calculated by adding up the value of all chargeable transfers made in the 7 years prior to the death.

Answer 71

A man died last week. He made the following chargeable transfers in the last 7 years: * A PET, three years ago (chargeable value £20,000). This has now failed. * An LCT, two years ago, (chargeable ,value £5,000). The man's cumulative total is £25,000. His NRB is therefore reduced from £325,000 to £300,000.

Answer 72

It is crucial to appreciate that the rules determining the property included in a person’s estate for tax purposes are different to those which govern the property included in a person’s succession estate. Therefore, the value of a person’s taxable death estate will frequently be different to the value of their succession estate. The general rule is that all property to which the deceased was beneficially entitled at the date of death is included in the estate for IHT purposes. This would include property situated both in the UK and abroad (where the taxpayer is UK-domiciled).

Answer 73

However, certain items of property may appear to belong to the deceased but are excluded for IHT purposes and conversely other types of property which do not belong to the deceased before death are included in the taxable estate. Everything that is not specifically excluded will be included in the taxable estate.

Answer 74

The following assets are included in the taxable estate even though, in some cases, it may not be immediately obvious why (e.g. because the deceased did not actually own the asset when they died): * All jointly owned property * Property subject to a reservation * Donationes mortis causa * Statutory nominations * Some interests in possession

Answer 75

Where the deceased owned property as a tenant in common, this share passes into the deceased’s estate for both tax purposes and distribution purposes. Where the deceased owned property as joint tenants with another/others the distribution of the property and the tax position are considered separately. Although the survivorship rule applies for distribution purposes, for IHT purposes there is a deemed severance of the joint tenancy immediately before death. This means that the deceased’s ‘share’ of the property will be included in their taxable estate.

Answer 76

A testator’s estate consists of: * House in sole name: £300,000 * Chattels (joint tenants): £8,000 * Cottage (tenants in common in equal shares): £200,000 The succession estate is worth: £300,000 (house) + £100,000 (1/2 cottage) = £400,000. The chattels pass by survivorship. The taxable estate is worth: £300,000 (house) + £4,000 (half chattels) + £100,000 (1/2 cottage) = £404,000.

Answer 77

If a person gives an asset away during their lifetime but reserves a benefit in that asset, the value of the asset at date of death will be included in the donor’s IHT estate when they die at the date of death value (s 102 Finance Act 1986). The most common example is where a parent transfers legal ownership of a property e.g. a holiday cottage to their children on the condition that the donor can continue to use it whenever they wish and free of charge. The parent in this case has reserved a benefit in an asset they previously owned and on the parent’s death the value of the holiday cottage at that date will be included in their estate for IHT purposes.

Answer 78

Individuals can avoid the gift with reservation of benefit (‘GROB’) rules by ensuring that they either do not derive any benefit from the assets they have given away, or, by paying a market value rent for the time they do derive benefit e.g. paying rent each time the donor uses the holiday cottage.

Answer 79

A donationes mortis causa (‘DMC’) is a lifetime gift which is made conditional on death. At the date of death the donor no longer owns the asset as it has been given away while they are alive. However, the conditional nature of the gift (and the donor’s ability to revoke it up until death) means that for IHT purposes the subject matter of the DMC is still part of the deceased’s estate and IHT will be payable on its value as at the date of death.

Answer 80

A person can make a written nomination of monies in any of the following accounts: * Friendly Society * Industrial Society * Provident Society The amount in each account must not exceed £5,000. On the death of the deceased, the monies in the relevant account(s) pass to the nominee, do not enter the distribution estate and may be distributed without a grant. However, such monies do form part of the IHT estate.

Answer 81

Before 22 March 2006, the capital value of all interest in possession trusts was treated as being owned by the person with the interest in possession (i.e. the life tenant) for IHT purposes (s 49(1) IHTA). It was therefore included in the life tenant’s taxable estate. This is still the case for existing interest in possession trusts provided they were created before 22 March 2006.

Answer 82

A man died last week. At his death, the man’s estate was worth £200,000. He was also the life tenant of a trust created in 2004. The capital value of the trust fund at the man’s death s £150,000. The taxable value of the man’s estate is £350,000 as it includes the value of the trust fund.

Answer 83

After March 2006, if a life interest trust is created following someone’s death e.g. by will, the life interest is referred to as an ‘immediate post death interest’ (s 49A IHTA). When a life tenant with an immediate post death interest dies, the capital value of the trust is included in their taxable death estate. If a new inter vivos life interest trust is created i.e. during the lifetime of the settlor, on or after 22 March 2006, the life tenant’s interest is not included in their taxable estate

Answer 84

Where the initial trust was created before that date, the rules on the previous page continue to apply, although there are special rules for 'transitional serial interests' (trusts with successive life interests, e.g. to A for life, then to B for life, then to C absolutely) where the successive life interests arise on or after 22 March 2006. You do not need to know about transitional serial interests.Example A woman died last week owning assets worth £200,000. She was also the life tenant of a trust created following her father’s death in 2012. The capital value of the trust at creation was £30,000, but had increased to £50,000 when the woman died.

Answer 85

The taxable value of the woman’s estate is £250,000 because it includes the value of the trust fund when she died. The life interest trust was created following the death of the woman’s father so she had an immediate post death interest.

Answer 86

* ‘Excluded property’ * Insurance policies written in trust for a third party * Discretionary pension scheme payments

Answer 87

The most common example of excluded property is a remainder interest (sometimes called a reversionary interest) in a life interest trust. If the remainderman of a life interest trust dies before the life tenant, the trust fund that would have passed to them on the life tenant’s death is not included in the remainderman’s taxable estate. In contrast, where a life tenant dies, the value of the trust fund is included in their taxable estate

Answer 88

If the deceased had an insurance policy on their own life where the sum payable on death was written in trust for another the proceeds of the policy are not included in the deceased's estate for IHT purposes. If the policy proceeds were payable to the deceased’s estate then the amount would be included in the taxable estate.

Answer 89

If the deceased was a member of an employer’s pension scheme any discretionary lump sum payment made by the pension fund trustees is not included in the taxable estate. As the payments are made entirely at the trustees’ discretion the deceased is not deemed to have any entitlement to the money, and the amount paid out (whether to a third party or to the deceased’s PRs) does not form part of the deceased’s estate for IHT purposes.

Answer 90

Many pension schemes allow contributors to indicate during their lifetime who should receive the money (often in an ‘Expression of Wish’ form) if the trustees exercise their discretion to make a payment after their death. The contributor’s expression of wish is not binding on the trustees as the nature of the payment is discretionary and they are not legally obliged to pay the person(s) indicated by the contributor, although in practice they almost always do. Pension lump sums payable by rightto the estate of the deceased are included in the taxable estate.

Answer 91

The general rule is that the assets in the estate are valued at market value at the date of death. However, some special rules apply in certain circumstances:

Answer 92

If the deceased owned quoted shares there are special rules for establishing the date of death value linked to the stock exchange prices on that date. They are valued by taking the lower of the two prices on the Stock Exchange Daily List and adding one-quarter of the difference between the higher and the lower value. An example can be found in another element.

Answer 93

If assets owed by spouses are worth more when valued together (e.g. because they form a set), each party’s share is valued at their proportionate share of the combined pair.

Answer 94

Where land is co-owned (whether as joint tenants or tenants in common) the value of the deceased’s share is reduced (by 10-15%) to reflect the difficulty of selling a share of the property rather than the whole. The deduction is not applied where the co-owners are married, as the related property rules apply and take priority. The valuation of other jointly owned property e.g. chattels does not commonly attract this discount. NB: Although HMRC has discretion as to the amount of the deduction, for the purposes of this module we apply a deduction of 10%.

Answer 95

A set of two vases is worth £100,000 but each vase alone is only worth £20,000. If the vases are owned one each by a husband and wife, for IHT purposes each party’s share will be valued at half the value of the combined pair i.e. £50,000, and not at the stand-alone value of the one vase each party in fact owns (£20,000).

Answer 96

Two siblings own a house together in equal shares. The whole house is worth £300,000. Each half share is therefore worth £150,000. When the first sibling dies, their taxable estate will include the value of the jointly owned asset as £135,000 (90% of £150,000). N.B. The same analysis would apply whether they were joint tenants or tenants in common in equal shares.

Answer 97

Now that you have calculated the value of the deceased’s assets, you must then deduct the following debts from the value of the estate: The deceased’s debts due at the date of death:This is money the deceased owed e.g. outstanding balance on a credit card or loan at the time of death.Post-death debts/expenses: The only post death debt/expenses that can be deducted for tax purposes are reasonable funeral expenses and the cost of a tombstone. Other post-death expenses are payable from estate assets but cannot be deducted from the value of the IHT estate to reduce the overall tax due.

Answer 98

It is then necessary to deduct any available exemptions or reliefs to reach the value of the taxable estate. For the purposes of this module the only exemptions and reliefs relevant to the death estate that you may be required to apply when calculating IHT on the death estate are: * Spouse exemption * Charity exemption * Business property relief (‘BPR’) * Agricultural property relief (‘APR’)

Answer 99

Once you have a figure for the taxable death estate, you can then calculate the tax due on that estate. There are several stages to this tax calculation. At Step 6 you should: Establish the value of the residence NRB (‘RNRB’) available. This includes the transferred RNRB if applicable.Apply a rate of 0% to the value of the taxable estate up to the total RNRB amount. If any value remains, consider Step 7.

Answer 100

Once you have considered the RNRB, the basic NRB and transferred NRB can be applied against the remaining taxable value. Establish the value of the NRB and any transferred NRB. Reduce the total NRB by the value of the cumulative total (from Step 1). Apply a rate of 0% to the value of the remaining taxable estate up to the total NRB amount. Apply the death rate of 40% to the rest to establish the IHT due.

Answer 101

The following steps must be taken in order to calculate IHT on the death estate: Calculate the cumulative total – This is the total chargeable value of all the chargeable transfers made in the previous 7 years. Identify the assets included in the taxable estate – Remember that this will not necessarily be the same as the assets included in the succession estate.

Answer 102

Value the taxable estate – Assets are generally given their market value although there are exceptions for related property and joint property. Deduct any debts – This includes lifetime debts and funeral expenses. Deduct available exemptions and reliefs – Consider the availability of spouse exemption, charity exemption, BPR and APR. Apply 0% rate up to the value of the residence NRB and any transferred amount. Apply 0% rate up to the value of the basic NRB and any transferred amount (after having taken away the cumulative total), then apply 40% rate to the remainder.

Answer 103

When a person dies, there may be separate IHT calculations that are required: · The tax due as a result of the transferor dying within seven years of making a lifetime transfer (LCTs and failed PETs). · The tax due as a result of the deemed transfer of the death estate. In this element we explore how different lifetime transfers affect the tax due following death in the context of worked examples.

Answer 104

We are now going to look at some simplified examples which show how the timing of PETs and LCTs affect the total IHT payable when an individual dies. This part of the element requires consideration of lifetime transfers and the death estate. Each of the examples involves an estate of the same size (£500,000) and two lifetime transfers (a PET with a chargeable value of £200,000 and an LCT with a chargeable value of £350,000). As we will see, the timing of the lifetime transfers not only affects the amount of IHT (if any) payable on the transfers themselves, but also affects the cumulative total on death, further impacting the IHT payable overall.

Answer 105

Example 1 An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts. A PET which if failed would have a chargeable value of £200,000 (10 years before death)An LCT with a chargeable value of £350,000 (9 years before death). IHT of £5,000 was paid on the LCT at the time.

Answer 106

* No IHT is due on the lifetime gifts when the woman dies. * Her death estate still has a full NRB available. * Her death estate is taxed at 40% on the value above the NRB. (£500,000 - £325,000 = £175,000). £175,000 x 40% = £70,000

Answer 107

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts. A PET which if failed would have a chargeable value of £200,000 (9 years before death)An LCT with a chargeable value of £350,000 (1 year before death). IHT of £5,000 was paid on the LCT at the time.

Answer 108

* The PET is now exempt from IHT as it was made more than 7 years before her death. * The LCT was made less than 7 years ago so it is reassessed for IHT. After applying the NRB, the remaining £25,000 is taxed at the death rate of 40% = £10,000. Credit of £5,000 is given for the £5,000 tax paid in her lifetime, leaving £5,000 to pay.

Answer 109

* The NRB on death is reduced by the chargeable value of the LCT. Therefore no NRB is available to the death estate. * Her entire death estate (£500,000) is taxed at 40%. = £200,000

Answer 110

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts. An LCT with a chargeable value of £350,000 (9 years before death). IHT of £5,000 was paid on the LCT at the time. A PET which if failed would have a chargeable value of £200,000 (1 year before death) * The LCT is not reassessed on death as it was made more than 7 years before death. It was more than 7 years before the PET too so the cumulative total on the PET is £0.

Answer 111

* The PET has failed and is chargeable to IHT. It is below the NRB so is taxed at 0% * The NRB on death is reduced by the value of the PET (£325,000 - £200,000) = £125,000. * Her death estate is taxed at 40% on assets above the remaining NRB. (£500,000 - £125,000 = £375,000). £375,000 x 40% = £150,000

Answer 112

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts. A PET which if failed would have a chargeable value of £200,000 (2 years before death)An LCT with a chargeable value of £350,000 (1 year before death). IHT of £5,000 was paid on the LCT at the time. * The PET has failed and is chargeable to IHT at 40%. It is below the NRB so is taxed at 0%

Answer 113

* The LCT is reassessed for IHT at the death rate of 40%. The cumulative total applicable to the LCT is £200,000. After applying the available NRB (£125,000), the remaining £225,000 is taxed at the death rate of 40% = £90,000. Credit is given for the £5,000 tax paid in her lifetime, leaving £85,000 to pay. * There is no NRB available to the death estate so the entire death estate (£500,000) is taxed at 40% = £200,000

Answer 114

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts. A PET which if failed would have a chargeable value of £200,000 (6 years before death)An LCT which if failed would have a chargeable value of £350,000 (4.5 years before death). IHT of £5,000 was paid on the LCT at the time.

Answer 115

· The PET has failed and is chargeable to IHT at 40%. The chargeable value is below the NRB so is taxed at 0%. · The LCT is reassessed for IHT at the death rate of 40%. The cumulative total on the date of the LCT is £200,000. After applying the available remaining NRB of £125,000, the balance of £225,000 is taxed at the death rate of 40% = £90,000. As the LCT was made 4-5 yrs before death taper relief reduces the tax payable by 40%. £90,000 x 60% = £54,000. Credit is given for the £5,000 tax paid in her lifetime, leaving £49,000 to pay re the LCT. · The cumulative total on death is more than £325,000 so no NRB is available. The entire death estate (£500,000) is taxed at 40% = £200,000 to pay re the death estate.

Answer 116

All of the examples above involved the same three transfers of value (a PET worth £200,000 and LCT worth £350,000 and a death estate worth £500,000). We can see below that the timing and order of the lifetime transfers can make a significant difference to the total overall tax payable. There is also an impact on who bears the tax liability. Liability for the tax payable on lifetime transfers rests with the transferee, while liability for the tax payable on the death estate rests with the PRs.

Answer 117

· LCTs are lifetime transfers into a trust. LCTs are immediately chargeable to IHT at a rate of 20%. If the transferor then dies within 7 years of making the transfer the LCT will be re-assessed at the rate of 40%. · PETs are lifetime transfers to an individual. PETs are not chargeable when made but become chargeable if the transferor dies within 7 years after making the transfer.

Answer 118

· Taper relief reduces the amount of tax payable following death in respect of a lifetime transfer that is chargeable (re-assessed LCT and failed PET) if the transferor survives 3 -7 years. · The order and timing of lifetime transfers affects the IHT due in respect of the lifetime transfers and in respect of the death estate. · The death estate taxation is affected by the lifetime transfers as they contribute towards the cumulative total on the date of death.

Answer 119

You are already aware that a charge to inheritance tax (‘IHT’) may arise in the event of: Lifetime Transfers PET LCT

Answer 120

A PET is a gift to a person. An LCT is a gift into a trust. PETs are not chargeable unless they fail (donor dies within 7 years). LCTs are chargeable when made and are re-taxed again if the donor dies within 7 years.

Answer 121

When a person dies there is a deemed transfer of their death estate. The charge to IHT is based on the value of assets in the deceased’s estate on the date of death.

Answer 122

When calculating the liability to IHT following a chargeable event (failed PET, LCT or death) IHT exemptions and reliefs can be used to reduce or eliminate the charge. Exemptions and reliefs work in slightly different ways (and are distinct from the nil rate band which is a 0% rate of tax and neither an exemption nor relief):

Answer 123

Certain gifts to individuals or other entitles are exempt from IHT. They can be made completely free from IHT and have no effect on the NRB. Gifts of particular assets benefit from relief. This means that, where the conditions of the relief are met, the amount of IHT payable is reduced (sometimes by 100%).

Answer 124

The exemptions and reliefs below are those you will focus on for this module. You will see reference to additional exemptions, and should be aware of them, but you are not required to apply them. Spouse exemption (s 18) Charity exemption (s 23) Family maintenance exemption (s 11)

Answer 125

Annual exemption (s 19) Small gifts allowance (s 20) The statutory requirements governing IHT exemptions and reliefs are set out in the Inheritance Tax Act 1984 (‘IHTA’). The relevant sections are noted below. Normal expenditure from income (s 21) Marriage exemption (s 22)

Answer 126

Business property relief (s 104) Agricultural property relief (s 116) Taper Relief (s 7) When exemptions/reliefs apply

Answer 127

Some exemptions and reliefs can only be applied to transfers made during the donor’s lifetime – this means the exemption or relief could be used in respect of: failed PET (donor died within 7 years of making a gift) LCT (taxed when made) LCT (if re-taxed following the donor’s death within 7 years) but not when calculating the IHT due in respect of the death estate. Other exemptions and reliefs apply only to the death estate and cannot be applied to a failed PET or LCT. Further exemptions and reliefs apply to both lifetime transfers and the death estate and should be applied in respect of all chargeable transfers.

Answer 128

As a practitioner it is important for you to know which exemptions and reliefs exist, when each will apply, and any criteria that must be satisfied before they can be used. Tax advice is commonly required when clients e.g. wish to carry out personal tax planning are liable to pay tax and the amount due must be calculated want to make a will or set up a trust. Failing to advise on the effective use of exemptions and reliefs may mean a solicitor is negligent. A table summarising the IHT exemptions and reliefs is set out on the following page.

Answer 129

Annual exemption Family maintenance exemption Small gifts exemption Marriage exemption Normal expenditure out of income exemption Taper relief Available on death only Woodlands relief Quick succession relief

Answer 130

Spouse exemption Charity exemption Business property relief Agricultural property relief Political party exemption Exemptions for gifts for national purposes or to heritage maintenance funds Exemption for gifts to EBTs Exemption for gifts to housing associations

Answer 131

There are different exemptions and reliefs which can be used to reduce or eliminate a charge to IHT. Some apply to lifetime gifts only and others only to the death estate, and some apply to both. Exemptions and reliefs are distinct from the nil rate band which is a 0% rate of tax. IHT exemptions and reliefs are contained in the Inheritance Tax Act 1984. Practitioners needs a good understating of exemptions and reliefs to properly advise their clients.

Answer 132

The Annual Exemption (‘AE’) allows individuals to make gifts of up to £3,000 each tax year free from IHT. The AE is applied chronologically to transfers (PETs or LCTs) when they are made. If more than one transfer is made on one day, the annual exemption is applied pro rata, irrespective of the order in which the gifts were made. The AE should be used after any other available exemption or relief is applied to ensure the AE is available for later transfers.

Answer 133

Once the AE for the current tax year is used first and in full a transferor may look back to the previous tax year (but no further) and use any part of the AE from the previous tax year that was not used at the time. Therefore, a maximum of 2 x AE (£6,000) may be available to use against a transfer (assuming no other transfers have been made in that tax year or the previous tax year). A tax year runs from 6 April one calendar year to 5 April the following calendar year

Answer 134

Shayla made a gift of £1,000 to her sister in January (Gift 1) and a gift of £4,500 to her brother (Gift 2) a few months later in May. These are the only gifts made by Shayla. Her AE could be used as follows: January: Gift 1 falls towards the end of a tax year in which no other gifts have been made. The AE of £3,000 for the tax year of Gift 1 is available. Shayla only needs to use £1,000 to cover the full value of Gift 1. £2,000 of this AE remains unused.

Answer 135

May: Gift 2 takes place in the following tax year. We know no other gifts have been made. The AE of £3,000 for the tax year of Gift 2 is available. In addition, a further AE of £1,500 from the previous tax year can be used to cover the full value of Gift 2. The amount of AE from the tax year of Gift 1 which still remains unused (£500) is effectively wasted – it cannot be carried forwards to any future tax years. NB: the current AE must be used first before any carried forward AE can be applied.

Answer 136

Shayla made a gift of £10,000 to her sister this tax year. Shayla has made no other gifts. Her AE could be used as follows: As Shayla has made no other gifts: The AE of £3,000 for the current tax year is available, and The AE of £3,000 from the previous tax year can also be used.

Answer 137

Once the total AE (£6,000) has been applied to her gift the amount of £4,000 remains. Shayla has therefore made a PET to the value of £4,000 - she must survive 7 years to avoid any IHT consequences of making this gift.

Answer 138

Maintenance payments are not treated as transfers for IHT purposes if made to: A spouse (or former spouse if part of a divorce settlement) The minor child of either party to a marriage for maintenance, education or training, or if over 18 and otherwise in full time education or training A dependent relative to make reasonable provision for their care. ‘Care’ is not defined but HMRC suggest that payments to cover the provision of services, whether privately or in an institution, would be covered (but not payments which go beyond maintenance).

Answer 139

Although the spouse exemption would normally apply for transfers between spouses, the maintenance exemption can be used in cases where the spouse exemption would not apply (e.g. if the recipient is domiciled outside the UK). Small gifts allowance (s 20 IHTA) Small gifts (of up to £250 per recipient) can also be made free from tax. A transferor can make multiple gifts of up to £250 to as many different people as they like. It differs from AE in that AE is an upper limit to the total value of all transfers in a tax year, whereas the small gifts exemption applies separately to each recipient with no limit to the number of different recipients.

Answer 140

The small gifts allowance is not available if combined with any other exemption, including the AE. If an individual wishes to make gifts of more than £250 to any one person they should rely on the AE instead. If a donor wants to give away e.g. £3,250 they cannot give this amount to one person and claim the AE and the small gifts allowance to cover the full value. However, if they gave £3,000 to one person and £250 to another person both reliefs could be claimed.

Answer 141

This exemption is most useful where a client has a number of different people to whom they wish to make gifts. For example, they may have a large family and want benefit different children or grandchildren. Clients could set up different accounts and make yearly transfers of £250. The exemption is often used for Christmas or birthday presents. If gifts to any one person in the same tax year exceed £250 the exemption does not apply at all for that donee.

Answer 142

A gives £250 to B - small gifts exemption applies. A gives £100 to B and later in the same tax year gives a further £150 to B – small gifts exemption applies. A gives £250 to 20 different people in a single tax year (total £5,000) – small gifts exemption applies to each gift. A gives £251 to B - small gifts exemption does not apply as the total value given to B exceeds £250.

Answer 143

A gift given in consideration of a marriage to a party of that marriage is exempt up to: £5,000 if made by a parent of one of the parties £2,500 if made by one party of the marriage to the other £2,500 if made by their remoter ancestor e.g. grandparent or great-grandparent; and £1,000 in any other case.

Answer 144

NB: marriage exemption and the annual exemption can both be claimed in respect of the same gift. For the purposes of s 22 IHTA, ‘child’ includes an illegitimate child, an adopted child and a step-child. The gift must be made in relation to a specific marriage – contemporaneously, or, before and conditional upon it, or, after if satisfying a previous legal obligation. The relief applies per donor in respect of a marriage so each parent of both parties could give £5,000 to their own child and together in total claim a maximum relief of £20,000. The relief applies per donor.

Answer 145

A transfer of value is exempt if made: from the donor’s income (not capital) as part of a normal/regular pattern of giving, and do not affect the donor’s standard of living. There is no upper limit to this exemption. Lightman J in Bennett v IRC said “as regards quantum, it is sufficient that a formula, or standard has been used, so that the amount can be identified”. It is a question of fact whether the requirements are satisfied. HMRC are more likely to accept the relief applies if transfers are made under a legal obligation, or there is clear history of a settled pattern of giving e.g. monthly payments.

Answer 146

A donor could mandate specific income e.g. dividends from certain shares, to be paid to the donee. Or, a donor could give away income generally each year e.g. 10% of total income. Taper Relief Taper relief is not an exemption. Instead, it reduces the amount of IHT that would otherwise be payable. To apply both of the following conditions must be met: A lifetime transfer was made 3 – 7 years prior to the transferor's death (i.e. a PET has failed / LCT will be re-assessed) IHT is payable in respect of the lifetime transfer (i.e. separately and in addition to IHT due in respect of the death estate)

Answer 147

transferor must have died (taper does not apply to the charge when an LCT is made). the value of the lifetime transfer must have been large enough to trigger IHT (you cannot taper a tax liability of zero). In basic terms, IHT will only be due on a lifetime transfer where the amount transferred was greater than the available nil rate band (‘NRB’). Where taper relief applies it does not reduce the value of a lifetime transfer, nor does it alter the rate of IHT. Instead it takes effect as a proportionate reduction of the final tax bill. The amount of the reduction depends on the number of years between the date of transfer and death. The rates by which the IHT charge is reduced are set out in the table on the following page.

Answer 148

when someone dies their death can trigger an IHT charge in respect of the death estate and a separate IHT charge in respect of lifetime gifts. It is always necessary to calculate the tax due on lifetime transfers separately from tax due on the death estate. Although taper relief is only applied after someone has died, the relief has no effect on the IHT payable in respect of their death estate.

Answer 149

Different exemptions and reliefs can be used to reduce or eliminate the charge to IHT. This element considered those which only apply to lifetime gifts (those applying to both lifetime and death transfers are not considered in this element). The AE is £3,000 per tax year. A previous year’s AE can also be claimed if needed (to the extent this was not previously used). Family maintenance exemption can be particularly useful with regards provision for minor children (or adult children in full time education) and dependent relatives.

Answer 150

Small gifts allowance applies gifts up to £250 per tax year (but not at all to any gift above this amount). Small gifts can be made to an unlimited number of individuals. Gifts made in contemplation of marriage qualify for an exemption. The amount available depends on the relationship between the donor and donee. Normal expenditure from income is useful where a person does not need or use all of their income. Taper relief reduces the amount of IHT due in respect of a lifetime gift which becomes taxable following the donor’s death.

Answer 151

Spouse exemption Charity exemption Business property relief Agricultural property relief Political party exemption Exemptions for gifts for national purposes or to heritage maintenance funds Exemption for gifts to EBTs Exemption for gifts to housing associations

Answer 152

Gifts between spouses during life and following death are completely exempt. Provided both parties are domiciled within the UK (which will always be the case in this module) there is no upper limit to the value of the exemption. It does not matter why the spouse inherits. The relief applies to the value of assets received under a will, intestacy, survivorship or any combination etc.

Answer 153

Unmarried couples cannot claim spouse exemption, irrespective of how long they have been in a relationship or living together and there is no concept of a “common law” spouse. A gift may be conditional provided the condition is satisfied within 12 months of death. A common example of a conditional gift is a 28 day survivorship clause.

Answer 154

A man gives his spouse £1M during his lifetime and on his death leaves his spouse a collection of paintings worth £3M. The spouse also inherits the man’s house by survivorship. The lifetime transfer of cash, and the death transfer of assets (both paintings and property) are entirely exempt from IHT.

Answer 155

Life Interest Trust Life Interest (right to income) Remainder Interest (right to capital on end of life interest) On a person's death, spouse exemption will apply to the value of assets transferred to a life interest trust if the surviving spouse receives a life interest i.e. named as the life tenant. However, spouse exemption does not apply if they receive a remainder interest i.e. named as the remainder beneficiary.

Answer 156

A woman dies and leaves her whole estate worth £2M “on trust to my husband for his life, remainder to my children”. The woman’s estate will qualify for spouse exemption as her surviving spouse has received a life interest following her death. The amount of the exemption is £2M.

Answer 157

A woman dies and leaves her whole estate worth £2M “on trust to my son for his life, remainder to my civil partner”. Spouse exemption does not apply-her civil partner did not receive a life interest. The woman’s estate will be subject to IHT.

Answer 158

All transfers to registered charities during life and following death are exempt irrespective of the amount given provided the gift is used exclusively for the purposes of the charity. The gift can be conditional provided the condition is satisfied within 12 months. The gift must be immediate and not in remainder for the exemption to apply. The gift must normally be absolute. The following is an example of a charitable gift found in a will that would attract the charity exemption: I GIVE to RSPCA of Wilberforce Way, Southwater, Horsham RH13 9RS RCN: 219099 (“the Charity”) the sum of one hundred thousand pounds (£100,000) absolutely for its general purposes

Answer 159

To qualify for an IHT exemption a gift must be made to a charity that comes within the jurisdiction of the High Court in England, Wales or Northern Ireland or the Court of Session in Scotland. A search of the UK national register of charities will reveal whether a charity is registered in the UK - generally registered charities are likely to qualify for IHT charity exemption. From a trust law perspective an organisation's charitable status may be questioned if it is not clear whether a gift is made for charitable rather than e.g. private purposes. These considerations are important as they can determine the effectiveness of a gift. However, even if a gift is confirmed as being made for charitable purposes, the IHT exemption will not apply unless the charitable body meets the other statutory requirements.

Answer 160

You should be aware of the following if a charitable gift is made under a will: In addition to charity exemption, which will apply to the charitable gift itself, a reduced rate of IHT (36% instead of 40%) may be available in respect of the chargeable assets in the estate.

Answer 161

The reduced rate applies where a deceased leaves at least 10% of their estate to charity. When drafting a will that includes a charitable gift, it is worth checking how close it comes to 10% of the net estate. It can be beneficial for the client to increase the amount of the proposed gift in order to ensure that the 36% rate applies. Rules regarding the reduced rate are complex and fall outside the scope of the module. In this module you will only be required to apply the death rate of 40%.

Answer 162

Spouse and charity exemption are the focus of this element. However, you should be aware of the other exemptions shown below in bold which also apply to lifetime transfers and the death estate. Spouse exemption Charity exemption Business property relief

Answer 163

Agricultural property relief Political party exemption Exemptions for gifts for national purposes or to heritage maintenance funds Exemption for gifts to EBTs Exemption for gifts to housing associations

Answer 164

Gifts to established political parties are exempt from IHT. In order to qualify for the exemption, one of the following conditions must apply (as at the last general election): The party had at least two MPs elected The party had at least one MP elected and at least 150,000 votes given to candidates representing that party.

Answer 165

A gift of land is exempt from IHT if it is made to a housing association or to a registered social landlord.

Answer 166

Gifts are exempt from IHT where they are made for designated ‘national purposes’. There is a list of bodies institutions in Schedule 3 which are covered by the exemption. The list includes museums and galleries which exist for specified purposes that are for the public benefit (such as the National Gallery and British Museum).

Answer 167

A similar exemption applies to gifts to funds which are designated as ‘heritage maintenance funds’. These are trusts which maintain historic buildings or land of scenic, scientific and historic interest. Gifts to the fund do not incur IHT, nor is the fund itself required to pay IHT (as long as it continues to be meet the requisite approval criteria).

Answer 168

There is another exemption for transfers of shares made into Employee Benefit Trusts (known as ‘EBTs’), providing they satisfy strict conditions set out in s28 IHTA. The law relating to the taxation of EBTs is complicated and is not assessed in this module. However, it is important to be aware of them as you may come across them when advising on corporate transactions or litigation matters, as well as if you work in a specialist tax or employment department.

Answer 169

EBTs are a tax-efficient way of remunerating employees. Historically they were also used for quite aggressive tax avoidance. This led to a significant amount of litigation by HMRC and the introduction of quite complicated anti-avoidance rules attempting to restrict their use. Attempts to avoid employment taxes using EBTs can give rise to unintended IHT charges so it is essential that specialist tax advice is sought whenever you encounter an EBT in practice.

Answer 170

There are a number of different exemptions and reliefs which can be used to reduce or eliminate the charge to IHT. This element considered those which apply equally to lifetime gifts and the death estate. Spouse exemption enables spouses to make lifetime and testamentary gifts to each other completely free from IHT. Spouse exemption for couples who are married applies equally to civil partners within a civil partnership. Charity exemption means a person can make lifetime and testamentary gifts to a registered charity completely free from IHT. There is no financial limit to the amount of spouse or charity exemption that can be claimed. Other exemptions and reliefs apply to lifetime and death transfers which are not assessed in this module, but which have been covered in this element for completeness.

Answer 171

Business Property Relief (‘BPR’) reduces the IHT payable on qualifying business property. Although a taxpayer can benefit from BPR at 100%, it is considered a relief rather than an exemption. The effect of BPR is to reduce the value of a taxable transfer by the amount attributed to the business property. A person must have owned qualifying business assets for the qualifying period of time. Qualifying business assets Business Assets include: Unquoted shares: includes all private company shares (i.e. in a “ltd” company) irrespective of the size of value of shareholding

Answer 172

shares listed on a recognised stock exchange (i.e. in a UK “PLC”) but these are only business assets if the taxpayer controls the company (50%+) Business or interest in a business: transferor is a sole trader or has a partnership interest Assets owned by taxpayer but used for business: Land/buildings/machinery owned by a taxpayer but used for business purposes by a company the transferor controlled or a partnership where the transferor was a partner

Answer 173

Where assets qualify the following rates of relief apply: Unquoted shares Quoted shares [In the module, assume a shareholder with quoted / PLC shares does not have a controlling interest unless told otherwise ie. it is unlikely you will apply this 50% rate]. Business or interest in a business Assets owned by taxpayer but used for business purposes Where assets qualify the following rates of relief apply: Unquoted shares Quoted shares [In the module, assume a shareholder with quoted / PLC shares does not have a controlling interest unless told otherwise ie. it is unlikely you will apply this 50% rate]. Business or interest in a business Assets owned by taxpayer but used for business purposes

Answer 174

A business (or interest in a business), or shares in a company, are not business property if the business concerned consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments. Rental property is considered an investment asset. These exclusions causes problems for property management companies, furnished holiday lets and also, historically, for caravan sites and assets within a business which are not used for trade. There is much case law in this area and it is important to appreciate that in practice it will not always be clear whether assets are held for ‘investment purposes’ or not. A business (or interest in a business), or shares in a company, are not business property if the business concerned consists wholly or mainly of dealing in securities, stocks or shares, land or buildings, or making or holding investments. Rental property is considered an investment asset. These exclusions causes problems for property management companies, furnished holiday lets and also, historically, for caravan sites and assets within a business which are not used for trade. There is much case law in this area and it is important to appreciate that in practice it will not always be clear whether assets are held for ‘investment purposes’ or not.

Answer 175

To qualify the transferor must have owned the business assets continuously for at least 2 years immediately prior to the relevant transfer. The type of business does not need to be the same throughout the 2 year period but there must have been a business for all of that time.

Answer 176

If qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the taxpayer’s period of ownership is usually treated as continuous. If a person inherits business assets following someone’s death, they are deemed to acquire the assets on the date of death (even though the assets will have been transferred to them after this date). If a person inherits business assets following the death of their spouse, they are deemed to have owned the property from the time it was originally acquired by their deceased spouse irrespective of how long they had been married (the survivor ‘inherits’ the period of ownership).

Answer 177

A acquires qualifying business assets and owns these for 5 years. A sells the business assets and uses the sale proceeds to invested in quoted shares. A’s quoted shareholding does not give them control of the quoted company. A dies 2 months later. No BPR applies in respect of A’s death. A does not own qualifying business assets when they die. B acquires qualifying business assets.

Answer 178

One year later, B sells those assets and uses the sale proceeds to buy replacement qualifying business assets. B later dies and their estate includes the replacement business assets. On B’s death, the period of time that B owned the original business assets can be taken into consideration when deciding if the replacement assets qualify for BPR. C dies and leaves their partnership interest to their child, D. The partnership interest qualifies for BPR and C’s estate claims 100% BPR. Six months after C’s death the assets are transferred to D. D makes a chargeable transfer of the business property 19 months later.

Answer 179

D can claim BPR. D is treated as having acquired the assets on the date of C’s death (i.e. 25 months ago) and the ownership requirement is met. E dies leaving all of their estate to their spouse, F. E acquired business assets 18 months before they died. E’s estate would not qualify for BPR because E did not own the business assets for 2 years before death. However, E’s estate is not taxable in any event because it passes to a surviving spouse. F dies 1 year later, leaving their estate to their children. F’s estate is entitled to BPR in respect of the business assets even though F had only owned these assets for 1 year- F is deemed to have owned the assets from when E had acquired them i.e. so 30 months ago (18 months + 12 months).

Answer 180

Where a taxpayer makes a PET or LCT of qualifying business assets and this transfer is assessed to IHT following the death of the transferor within 7 years, BPR is only available for the lifetime transfer if the qualifying property transferred (or replacement qualifying property): - is owned by the transferee; and -qualifies for BPR when the transferor dies (or on the death of the transferee if earlier). -There is no minimum ownership requirement of 2 years for the transferee.

Answer 181

A makes a PET of shares in a ltd trading company worth £400,000 to B. A had owned the assets for 3 years prior to making the gift. A dies 5 years later. The PET has failed and is now assessed to IHT. When deciding whether A’s estate can claim BPR in respect of the failed PET, BPR will only be available if B still owns the business assets transferred. If B had sold half of the shares for £50,000 before A died, BPR could still be claimed in respect of A’s PET, but only with reference to the proportion retained by B – i.e. on £200,000. Agricultural Property Relief (ss 115 -124 IHTA) Agricultural Property Relief (‘APR’) reduces the IHT payable on the agricultural value of qualifying assets. The ‘agricultural value’ may not be the same as the market value. The definition of ‘agricultural value’ is outside the scope of the module.

Answer 182

The effect of APR is to reduce the value of a taxable transfer by the amount attributed to the agricultural property. Although a taxpayer can benefit from APR at 100%, it is considered a relief rather than an exemption. A person must have owned qualifying assets for the qualifying period.

Answer 183

Agricultural land and buildings: used for purposes connected with agricultural activity. Farmhouses and cottages: may qualify if they are of a ‘character appropriate’ to the associated agricultural land and have been occupied for the purposes of agriculture e.g. farmhouse occupied by a farm worker or their surviving spouse and not someone who occupies for purely domestic reasons.

Answer 184

Qualifying property must have been: * occupied for agricultural purposes by the transferor throughout the two years immediately before the transfer, or, * owned by the transferor and occupied by them or another for agricultural purposes throughout seven years immediately before the transfer. Note the following exceptions which also apply to BPR: * If qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the taxpayer’s period of ownership is usually treated as continuous. * If a person inherits qualifying assets following someone’s death, they are deemed to acquire the assets on the date of death (even though the assets will have been transferred to them after this date). * If a person inherits qualifying assets following the death of their spouse, they are deemed to have owned the property from when it was originally acquired by the deceased spouse irrespective of how long they were married (the survivor ‘inherits’ the period of ownership).

Answer 185

100% relief is available if the transferor was the owner occupier (or would be entitled to vacant possession within 12 months from the date of the transfer), or, the property was let on a tenancy beginning on or after 1st September 1995. This is usually the case. 50% relief applies less frequently, and usually in respect of tenancies created before September 1995.

Answer 186

Example If a person purchases a farm and occupies it for farming purposes the property will qualify for APR after two years of owner occupation. If a person purchases a farm and lets it out (after 1995), and the tenant occupies the land for farming purposes, the property will qualify for APR after seven years of occupation. In both cases the rate of relief will be 100%.

Answer 187

A man dies leaving his estate to his children. His estate includes agricultural land with an agricultural value of £2 million and a market value of £2.3 million. The man has owned and occupied the land for agricultural purposes for sixty years. The remaining assets in his estate are valued at £500,000. The value of the man’s estate is £2.8 million (£2.3 million + £500,000). APR of £2 million (the agricultural value of the land) can be claimed. The estate qualifies for relief at 100% (so no IHT is payable on this amount). The remaining estate will be taxed at 40% above the available NRB.

Answer 188

Where a taxpayer makes a PET or LCT of qualifying agricultural property and this transfer is assessed to IHT following the death of the transferor within 7 years, APR is only available for the lifetime transfer if the qualifying property transferred (or replacement qualifying property): -is owned by the transferee; and -qualifies for APR when the transferor dies (or on the death of the transferee if earlier). -There is no minimum ownership requirement of 2 years for the transferee.

Answer 189

A makes a PET of a farming partnership worth £400,000 to B. A had owned the partnership interest for 3 years prior to making the gift. A dies 5 years later. The PET has failed and is now assessed to IHT. When deciding whether A’s estate can claim APR in respect of the failed PET, APR will only be available if B still owns the partnership interest transferred (or replacement qualifying agricultural assets). If B had sold half of the partnership for £50,000 before A died, APR could still be claimed in respect of A’s PET, but only with reference to the proportion retained by B – i.e. on £200,000.

Answer 190

APR is given in priority to BPR in scenarios where both reliefs would apply. It is not possible to claim BPR on a business asset if that asset also qualifies for APR. Both reliefs may apply in the context of commercial farming enterprises. Some assets may qualify for both relief and others for only one. Agricultural buildings may qualify for both – so APR applies in priority Livestock is not included in the definition of agricultural property but its value may qualify for BPR Farmhouses/cottages are unlikely to qualify for BPR, but may qualify for APR

Answer 191

Woodlands relief (s 125 IHTA) Gifts of woodland following death may qualify for woodlands relief. If the deceased had purchased the woodland, they must have owned it for at least 5 years before dying for the relief to apply. If the deceased had themselves inherited the woodland following someone else’s death, there is no qualifying period of ownership.

Answer 192

There are a number of different exemptions and reliefs which can be used to reduce or eliminate the charge to IHT. This element considered the reliefs which apply equally to lifetime gifts and the death estate. BPR and APR reduce the value of a transfer to the extent the assets transferred qualify for the relief. 100% BPR applies in respect of all private company shares, partnership interests and to a sole trader business. 50% BPR applies to quoted shareholdings (if the taxpayer had control of the company) and also to assets owned by a taxpayer but used for business purposes. For APR to apply the property must have been occupied for agricultural purposes for at least 2 years (if transferor occupied) or 7 years (if someone else occupied). APR of 100% of the agricultural value of the property can be claimed in most cases (but if the property was subject to a tenancy that started before September 1995, 50% relief would usually apply). Where APR and BPR both apply, APR takes priority.

Answer 193

Woodlands relief is a deferral of the IHT that would otherwise be payable on the value of the woodland. To use the deferral those administering the estate should make an election to exclude the value of the woodland from the death estate. The value of the woodland is the value of the trees (i.e. timber) and not the land itself. Tax is deferred until the timber, not the land, is subsequently sold or given away. As woodlands relief only applies to the value of the timber (not the land) and is a deferral rather than reduction of liability it may be preferable to consider alternative reliefs that might apply instead

Answer 194

Business property – so business property relief (‘BPR’) might apply. Agricultural property – so agricultural property relief (‘APR’) might apply. BPR should be considered where woodland is used for commercial purposes e.g. commercial fishing or timber harvesting. APR can be considered if the land is classified as agricultural land or ancillary to this. BPR and APR are more generous reliefs and if they apply would usually be claimed instead of woodland relief. The application of BPR and APR is not considered in detail in this element.

Answer 195

Quick succession relief (‘QSR’) is intended to help the tax-payer where the same assets would otherwise be subject to more than one IHT charge in quick succession. QSR applies where a person dies and: their death estate includes assets received by way of gift or inheritance, in the 5 years before their death, and those assets were subject to an IHT charge when transferred to the deceased.

Answer 196

A woman dies and leaves all of her estate to her brother. IHT was payable on the woman’s death. The brother dies 3 years later and leaves all of his estate (which includes the items previously inherited from his sister) to his children. IHT is payable on the brother’s estate. QSR reduces the IHT payable on the brother’s estate to the extent it is attributable to assets which had been previously been charged to IHT in the woman’s estate. For QSR to be relevant IHT must have been payable – both on the original transfer and following the subsequent death.

Answer 197

A dies leaving all their assets to B. B dies 2 years later. No IHT was payable on A’s death as value of A’s estate was less than the nil rate band. IHT is payable on B’s estate. QSR does not apply. The assets that B inherited from A’s estate were not previously subject to an IHT charge. The application of the relief can be complex to work out but in principle the tax paid previously is credited against the later IHT charge. If death occurs with one year of the previous IHT charge, the relief is calculated with reference to 100% of the amount of IHT paid previously. This reduces each year, and only 20% of the amount of IHT paid previously is considered where death occurs 4-5 years after the original charge.

Answer 198

There are a number of different exemptions and reliefs which can be used to reduce or eliminate IHT. Some of these apply only to the taxation of the death estate. Woodlands relief is a deferral of tax on the value of the woodland until it is sold. Quick Succession Relief is reduction in the IHT charge following death where assets in the deceased's estate had been transferred to the deceased in the 5 years before their death and those assets were subject to IHT at the time of the transfer. The reliefs in this element are not considered in detail in this module.

Answer 199

The administration process carried out by PRs can be roughly divided into two stages Steps required from death up to the issue of the grant of representation – including the account and payment of inheritance tax (IHT) Steps required from issue of the grant to completion of the administration

Answer 200

The PRs of an estate have a duty under s.216 Inheritance Tax Act 1984 to: Deliver an account to HMRC regarding the deceased’s estate Pay any IHT due in respect of the succession estate PRs should deliver an account to HMRC specifying: all of the property comprising the deceased’s taxable estate immediately before death and the value of each item at the date of death (in essence a list of assets and liabilities) the exemptions and reliefs that apply.

Answer 201

The account provides the basis upon which the amount of IHT due (or not) is calculated and the form is submitted to HMRC along with payment for any IHT due. The next page explains in basic terms how HMRC assess the IHT position using the information provided. IHT is calculated by adding the value of the deceased’s taxable assets, then reducing this figure by deducting the deceased’s debts and applying exemptions /reliefs. No IHT is due on assets passing to a spouse or charity. If business property relief (‘BPR’) applies, no IHT is due on business assets.

Answer 202

Once deductions are made the tax rates are applied: 0% on the nil rate band (‘NRB’) (value up to £325,000 – though figure may vary) 40% on any value above the NRB. If the deceased’s (D) spouse (Y) pre-deceased them, D’s estate may be entitled to claim the unused part of Y’s NRB – the transferrable NRB (TNRB)

Answer 203

A man dies leaving his estate to his wife - no IHT is due (irrespective of the value) as the whole estate is spouse exempt. A woman dies leaving her estate to charity - no IHT is due (irrespective of the value) as the whole estate is charity exempt. A woman dies leaving her estate to her son. The estate comprises £30,000 and a business worth £500,000 (which qualifies for BPR). The estate is valued at £530,000 but after the deduction of BPR the value that remains is £30,000. This amount falls within the 0% nil rate band so no IHT is due.

Answer 204

The deadline for submitting the account is: 12 months from the end of the month in which the death occurred. If the deceased died on 15 March the IHT account would need to be submitted by 31 March the following year. The deadline for paying IHT due is: 6 months from the end of the month in which death occurred, after which interest becomes payable on the unpaid tax. If the deceased died on 15 March the IHT should be paid by 30 September.

Answer 205

In practice the PRs will submit the account and pay the IHT due as soon as possible because the: grant will not be issued until information about the estate has been provided to HMRC and any IHT has been paid; the PRs need the grant to carry out the administration payment of interest on unpaid IHT should be avoided. Example: If the deceased died on 18 January the due date for submitting the IHT account is 31 January the following year. However, as interest would be charged on any IHT that has not been paid by 31 July the PRs should pay the IHT and submit the account by the earlier date.

Answer 206

Under ss. 227-228 IHTA the IHT due in respect of certain assets may be paid by 10 equal annual instalments. The first instalment is due by the usual deadline (i.e. six months after the end of the month in which the deceased died). The remaining instalments are due on each subsequent anniversary date, with interest usually charged on any IHT that remains outstanding after the initial deadline date.

Answer 207

Usually, PRs must pay the tax for which they are liable when they submit the IHT400 (required before the grant is issued), whether or not the six-month deadline has passed (s.226 (1)(2) IHTA 1984). However, if instalment option is being used, when the PRs submit the IHT400 they only need to pay instalments that have become due by that date. This means that if the grant application is made before the IHT due date, the PRs will pay the non-instalment IHT at this time but are not required to pay the IHT attributable to the instalment option property. To the extent instalment option IHT remains unpaid following the issue of the grant, the PRs should take care to ensure the first instalment is paid by the usual deadline to avoid interest payments.

Answer 208

· Land and buildings · Company shares/securities giving the deceased control · Some unquoted company shares/securities that did not give control where: o payment cannot be made without undue hardship, or o the tax attributable to the shares (and other instalment option property) represents 20% or more of the total tax for which the PRs are liable, or o the value of the shares is greater than £20,000 and the shareholding represents at least 10% of the nominal value of all the company shares. · Farms or interest in a farming business · Business or interest in a business · Timber

Answer 209

Instalment option exists to prevent undue hardship on the taxpayer. If any property to which instalment option applies is subsequently sold, the instalment option ceases in relation to that property. The outstanding IHT on that property is due immediately and the sale proceeds are available to meet this liability. For this module you are not required to calculate how much IHT may be paid by instalments i.e. apportion the overall tax to the value of the assets on which instalment option may be claimed.

Answer 210

Unless the estate is excepted the PRs report to HMRC about the estate assets and liabilities by completing form IHT 400 (IHT account). Completing the IHT 400 can be time consuming and complicated if a large number of the supplemental schedules also need to be completed. If the estate is excepted, the PRs are not required to complete an IHT400. Instead, they provide information about the value of the estate as part of the application for the grant of representation. Key information is then sent by the Probate Registry to HMRC. The IHT400 must be used unless an estate is excepted so it is therefore important to establish whether a particular estate is excepted or not.

Answer 211

* Low value excepted estate * Exempt excepted estate If neither of these apply, the estate is not excepted. For this module you are not required to know the law governing the estate of a non-domiciled individual.

Answer 212

A low value excepted estate is one where there is: no IHT payable, and the reason for this is because the gross value of the estate is below the NRB. The gross value for these purposes is the total taxable estate figure plus the value of certain ‘specified transfers’ plus the value of ‘specified exempt transfers’.

Answer 213

Specified transfers include chargeable transfers made in the 7 years before death comprising cash, chattels, shares or land. Specified exempt transfers include exempt gifts to spouses/civil partners and charities. The NRB considered here is**:** · The current NRB amount and any transferable NRB available from their spouse**.** · The residence NRB is not considered, and if claimed, the estate cannot be excepted.

Answer 214

A woman dies and leaves her estate to her friend. She had never married, made no lifetime gifts and had no debts. The woman’s estate includes her home (£300,000), bank account (£2,000) and car (£1,500). The total (gross) value is £303,500. This is below the NRB of £325,000 so the whole of the estate is taxed at 0% and no IHT is payable. A woman dies leaving her estate to her daughter. She made no lifetime gifts and had no debts. The woman’s civil partner (CP) died before her and did not use any of her own NRB. The woman’s estate includes her home (£600,000), bank account (£2,000) and car (£1,500). The total (gross) value is £603,500. CP did not use her own NRB so it can be transferred in full to the woman’s estate - which qualifies for the woman’s own NRB and a TNRB. The value of the woman’s estate is below £650,000 (2xNRB) so the whole of the estate is taxed at 0% and no IHT is payable.

Answer 215

An exempt excepted estate is one where: * the gross value of the estate is no more than £3 million, but * no IHT is payable, and the reason for this is because * after debts are deducted and spouse and/or charity exemption are applied the net value of the estate is below the NRB.(N.B. debts alone cannot bring the estate into exempt excepted status). The meaning of gross value and NRB are the same as for the low value excepted estate. Only spouse or charity exemption can be considered for these purposes – no other reliefs can be taken into account.

Answer 216

A man dies leaving his estate worth £3.5M to his spouse. No IHT is payable because the whole estate passes to his spouse and is exempt. However, this is not an exempt excepted estate because the value of the estate is more than £3 million. A man dies leaving his estate worth £400,000 to his son. After BPR is applied the value of the estate is £50,000. No IHT is due as all of the estate falls within the NRB. However, this is not an excepted estate because although the estate is worth less than £3M and no IHT is due, this is only because of BPR - and BPR cannot be considered for these purposes. A woman dies leaving her estate worth £600,000 to a charity. No IHT is payable because the whole estate passes to a charity and is exempt.

Answer 217

This will be an exempt excepted estate. A woman dies leaving her estate worth £400,000 equally between her spouse and children. The value of the spouse exemption is £200,000 and once this is taken into account the remaining £200,000 falls within the NRB and is taxed at 0%. No IHT is payable. This will be an exempt excepted estate. Which of the following estates are excepted? [A] A man dies with an estate valued at £700,000. He had no debts and had never married or entered a civil partnership. He gives £60,000 to a charity, which leaves a net estate £640,000. [B] A widower dies. His wife died 3 years before him and did not use any of her own NRB. The man’s estate is valued as per [A] above. [C] A widower dies with an estate valued at £360,000. His wife died 3 years before him and used half of her NRB.

Answer 218

[A] A man dies with an estate valued at £700,000. He had no debts and had never married or entered a civil partnership. He gives £60,000 to a charity, which leaves a net estate £640,000. Although the estate is worth less than £3m and charity exemption applies, the value after charity relief has been considered is still above the NRB. IHT is payable and the estate is not excepted. [B] A widower dies. His wife died before him and did not use any of her own NRB. The man’s estate is valued as per [A] above. The man’s PRs will claim his NRB and the TNRB from his spouse. After the gift to the charity, the remaining estate (£640,000) is below £650,000 (2x NRB) and no tax is due. This is an exempt excepted estate. [C] A widower dies with an estate valued at £360,000. His wife died before him and used half of her NRB. The man’s PRs will claim his NRB and the unused TNRB from his spouse. No tax is due because the total NRB is greater than £360,000 (£325,000 + £162,500). This is a low value excepted estate.

Answer 219

Once the PRs have established that an estate may be either a low value or exempt excepted estate they must also check that no additional factors prevent the estate from being excepted. If any of the following apply, the estate cannot be excepted: The deceased made a gift with reservation of benefit that subsists at death (or the reservation ended in the 7 years prior to death and the transfer was not exempt) The estate includes either more than one trust interest, or, a single trust interest worth more than £250,000 (and is not passing to spouse) Foreign assets are worth more than £100,000 The value of specified transfers exceeds £250,000 A claim for the RNRB is being made (the claim for RNRB - IHT 435/6 - would accompany the IHT 400).

Answer 220

LOW VALUE Estate gross value below NRB (current NRB amount and any TNRB available from their spouse) No IHT because EXEMPT Estate gross value not above £3m & after the deduction of liabilities, spouse/civil partner exemption and/or charity exemption the value of the estate does not exceed the NRB (current amount and any transferred). No gift with reservation of benefit Foreign assets cannot exceed £100k Only 1 trust & its value cannot exceed £250k (unless passing to spouse) Specified transfers cannot exceed £250K No claim is being made for the RNRB

Answer 221

The factors which determine whether an estate is excepted or not are considered for the purposes of deciding whether to complete form IHT 400. They do not affect the distribution of the estate or the calculation of IHT due. An advantage of dealing with an excepted estate is that it is simpler and quicker than the IHT 400. If the estate is excepted, then there is no form to complete and send to HMRC. The IHT 400 is a long form and is supplemented by additional forms called schedules (IHT401 - IHT 420) which contain detailed information about each of the assets. Which schedules should be completed will depend on the assets held by the deceased.

Answer 222

Remember that it is the date of death values which are relevant for IHT purposes and when completing the IHT 400. Changes in the value of the assets post death are not recorded for these purposes (unless the PRs make a claim for loss relief). Loss relief entitles the PRs to claim a partial refund of IHT where losses occur on the sale of certain assets within prescribed time frames – the detail of this relief is beyond the scope of the module.

Answer 223

Although post death changes to the estate are not usually notified to HMRC, if the PRs discover later on that the date of death information provided in the IHT400 was inaccurate, and too much or too little IHT has been paid, this must be corrected. Revised information is set out in corrective account Form C4. The C4 is used to inform HMRC about: additional assets/ liabilities discovered after the IHT 400 was submitted corrections to the value of assets/liabilities originally included in the IHT400

Answer 224

changes to exemptions/reliefs applied – e.g. an increase or decrease in value or where these were not claimed or not due a variation of the original beneficiary entitlements which affect the IHT liability e.g. changes in the value of what an exempt beneficiary receives If the PRs complete a C4 they will also make an adjustment to the calculation of IHT as the liability has either increased or decreased. If new assets are discovered, the original value of an asset was too low (or a liability too high), or reliefs were mistakenly claimed - the total value of the taxable estate will increase. The PRs should pay the additional IHT due when sending HMRC the C4. If new liabilities are discovered, the original value of an asset was too high (or liability too low), or reliefs due were not claimed - the total value of the taxable estate will decrease. The PRs will claim a refund of IHT already paid.

Answer 225

PRs cannot obtain a grant without payment of IHT but in most cases cannot access the deceased’s assets without a grant – so with what money do they pay the tax due? The options available are: - Direct Payment Scheme - Borrowing Direct Payment Scheme Banks or building societies may not be able to release funds to the PRs prior to the issue of the grant but they can be asked to make a direct payment from the deceased’s account(s) to HMRC by telegraphic transfer under the Direct Payment Scheme. PRs must complete schedule IHT 423.

Answer 226

From a beneficiary (often interest free). The main beneficiary of the estate will often fund the payment of IHT using funds outside of the succession estate/ for which the grant is not required e.g. money held in a joint bank account which passed by survivorship, or the proceeds of a life policy written in trust. From a bank, where commercial rates of interest will apply.

Answer 227

The value of the deceased’s assets and liabilities at the date of death are set out in form IHT 400. No form is required for an excepted estate (low value or exempt). IHT 400 for any estate which is not excepted. If IHT is payable on an estate, it will never be excepted. If no IHT is payable, the estate may be excepted if the required criteria are met. The deadline for submitting the IHT 400 is 12 months from the end of the month of death. The deadline for paying IHT (or the first instalment where instalment option is used) is 6 months from the end of the month of death. To raise funds to pay the IHT due prior to the issue of the grant the PRs may use the direct payment scheme or arrange to borrow money.