Chapter 4 - Inheritance Tax

Question 1

What is the death rate of IHT?

Answer 1

40%

Question 2

What is the lifetime rate of IHT?

Answer 2

20%

Question 3

If an individual leaves 10% or more of their net estate to charity what rate of IHT is paid?

Answer 3

36%

Question 4

How much is the current standard Nil Rate Band (NRB)

Answer 4

£325,000

Question 5

How much is the Residence Nil Rate Band (RNRB) for tax year 2017/18?

Answer 5

£100,000

Question 6

Name 3 conditions applying to the RNRB?

Answer 6

• Where a home is being left to a direct descendent – a child and their lineal descendants (foster, step and adopted children are included for this purpose)
• The value of the home is after deducting any outstanding mortgage
• If the home is worth less than the RNRB the RNRB is reduced to the value of the home
• It is tapered for estates over £2m
• Only available on 1 home but able to choose which if they own more than 1 at time of death as long as it has been their main residence at some point
• Can inherit deceased spouses RNRB

Question 7

How much of a deceased spouses NRB can the surviving spouse inherit?

Answer 7

The surviving spouse can inherit any unused % that was not used on first death. The percentage is applied on the NRB that applied at date of death.

For example someone dies in the year the NRB was £250,000 and left £50,000 to their children then £50,000/£250,000 = 20% used.

80% can therefore be inherited by the surviving spouse.

Question 8

With regard to domicile what is UK IHT charged on?

Answer 8

For UK domiciled individuals IHT is charged on worldwide assets.

For non UK domiciled individuals IHT is charged on UK assets

Question 9

What is the loss to the estate principle?

Answer 9

A chargeable transfer for IHT is calculated on the loss to the estate principle. Not the consideration of value but what has been lost by the estate.

For example;
Joe gives away one chair worth £2,000 from a set of six worth £30,000, now the remaining 5 are worth £15,000. The loss to the estate is £15,000 so this is chargeable for IHT not the £2,000.

Question 10

What is gratuitous intent?

Answer 10

A transfer not at arms length to a connected person

Question 11

Name 5 IHT exemptions.

Answer 11

• Spousal exemption
• Annual exemption
• Small gifts
• Normal expenditure
• Gifts on marriage
• Education and maintenance
• Charity
• Political parties
• National benefit
• Death on active service

Question 12

How does the spousal exemption work?

Answer 12

Transfers between spouses unlimited and not subject to IHT

Question 13

How much is the annual exemption and how does it work?

Answer 13

£3,000 per year, can carry forward 1 years if not used, can be offset against larger gifts

Question 14

How much is the small gift exemption and how does it work?

Answer 14

Up to £250. To unlimited number of people. Can not be offset against larger gifts

Question 15

How does the gifts from normal expenditure work?

Answer 15

Must not reduce standard of living. Must be from surplus income NOT CAPITAL

Question 16

How much are the gifts on marriage exemptions and how does it work?

Answer 16

£5,000 parent,
£2,500 grandparent or to other party in marriage,
£1,000 any one

Must be made before the marriage

Question 17

How does the education and maintenance exemption work?

Answer 17

All payments are exempt

Up until tax year when child becomes 18
Or
Ends full time education, whichever is later

Illegitimate, adopted and step-children are included

Not grandchildren or more remote relatives

Dependent relative of donor is exempt

Question 18

How does the gifts to charity exemption work?

Answer 18

Any gifts to EU based charity is totally exempt

Question 19

How does the gifts to political parties exemption work?

Answer 19

Any gifts to political party is totally exempt providing;

2 x MP elected at last general election
1 x MP + 150,000 votes overall

Question 20

How does the gifts for the national benefit exemption work?

Answer 20

Any gifts totally exempt if left to;
Museums
Libraries
Universities
National Trust
Land to Housing Association etc

Question 21

What are the main IHT reliefs available?

Answer 21

Taper relief
Business property relief
Agricultural property relief
Woodlands relief

Question 22

How does taper relief work?

Answer 22

Relief given for surviving a period of time over 3 years but not quite 7 after making a gift.

Relief applies to eventual IHT due on a gift over the NRB

Question 23

What are the rates of taper relief?

Answer 23

Surviving 3 - 4 years = 80% of the full charge
Surviving 4 - 5 years = 60% of the full charge
Surviving 5 - 6 years = 40% of the full charge
Surviving 6 - 7 years = 20% of the full charge

Question 24

How does business property relief work?

Answer 24

The business or interest in a business must be owned for 2 years and cant be the subject of a binding sale.

100% relief for shares in unincorporated businesses (including AIM shares)

50% relief for shares in listed companies

Question 25

How does agricultural property relief work?

Answer 25

100% relief given for land, growing crops and farm buildings – NOT animals or equipment

Question 26

How does woodlands relief work?

Answer 26

Relief for growing timber in the UK or EEA. Not on the land or the wood if cut down,

Question 27

What is the difference between a Potentially Exempt Transfer (PET) and a Chargeable Lifetime Transfer (CLT)?

Answer 27

PET – direct gift or gift to bare trust
CLT – gift into trust

Providing 7 years survived there will never be any further tax on a PET.

CLTs however use up the cumulative NRB and lifetime gifts in excess of this will incur IHT at the lifetime rate (20% or 25% if paid by settlor)

Question 28

What potential charges could be due on a CLT?

Answer 28

• Immediate
• Additional
• 10 year periodic
• Proportionate exit

Question 29

When might an immediate IHT tax charge be paid?

Answer 29

When the cumulative total of CLT’s in the last 7 years exceeds the available NRB

Question 30

What rate is an immediate tax charge paid at if it is paid by the trustees and if it is paid by the settlor of the trust?

Answer 30

If paid by the trustees = 20%
If paid by the settlor = 25%. 25% as the tax is paid on the “grossed up” amount i.e the tax is paid on the gift and the tax

Question 31

When would an additional tax charge be payable?

Answer 31

If an immediate tax charge occurred and then the settlor died within 7 years. Relief is given for the immediate tax charge

Question 32

If the additional tax charge is less than the immediate tax charge is a refund given?

Answer 32

No, no excess is due but no refund given

Question 33

What is a gift with reservation and how many examples can you think of?

Answer 33

An asset is given away where the donor retains an interest in it.

If this occurs it is treated like the gift never happened and the full value is included in the estate on death.

Examples;

Gifting your property away and continuing to live there rent free

Continuing to take an income from an investment you have gifted away

Hanging a painting, which you have gifted away on your wall

Question 34

What is pre owned assets tax and what is it designed to do?

Answer 34

Pre owned assets tax is designed to capture individuals trying to circumnavigate the gift with reservation rules.

If subject to POAT then the annual cash benefit is added to the individuals income for the year