IHT

Question 1

List the three main occasions where IHT may be charged.

Answer 1

1) On death - it’s primarily a tax to take effect at death and aims to levy a tax on the wealth that person has acquired during their lifetime. It is charged on the value of their estate less any exceptions.

2) Lifetime gifts made to individuals within 7 years prior to death - known as PET’s (potentially exempt transfers). Provided the transferor survives for more than 7 years the gift will be tax free, however it won’t be should they die within this period.

3) Lifetime gift to a company our trust - IHT applies to gifts to a trust/ company at the time it is made unless the trust is for a disabled person.

Question 2

Define chargeable transfer .

Answer 2

A transfer of value which is made by an individual but is not an exempt transfer (s1 and s2 IHTA 1984).

Question 3

What three things will a chargeable transfer apply to?

Answer 3

a) The transfer on death;
b) Lifetime transfer which is [potentially exempt when it is made but becomes chargeable because the transferor dies within seven years; or
c) A lifetime transfer which is immediately chargeable at the time when it is made.

Question 4

List the basic steps for calculating IHT.

Answer 4

1) Identify the transfer of value (a disposition which reduces the value of the transferor’s estate. eg death is a deemed transfer off value ;
2) Find the value transferred;
3) Apply exemptions and reliefs;
4) Calculate tax at the appropriate rate.

Question 5

Explain step 1 identify the transfer of value.

Answer 5

Lifetime transfer of value is any disposition which reduces the transferor’s estate. Gift of asset reduces value of their estate, whereas sale at market value will just exchange the asset for cash and so there is no reduction. On death, tax is charged as if deceased has made transfer of value of their estate.

Question 6

Explain step 2 - find the value transferred.

Answer 6

For lifetime transfers this is the amount of reduction in the transferor’s estate. On death, it will be the value of the estate.

Question 7

Explain step 3 - apply relevant exemptions and reliefs.

Answer 7

various exemptions and reliefs exist for public policy reasons (eg gifts to charities and transfers to spouses/ civil partners. Some however only apply to lifetime transfers (such as the annual exemption).

Question 8

Give the two most common reliefs which can apply to both lifetime transfers and transfers on death.

Answer 8

Business property relief and agricultural property relief.

Question 9

Explain step 4 - calculate tax at the appropriate rate.

Answer 9

• Range of tax rates apply to IHT, the lowest being zero per cent.
• Rate of tax for value in excess of the nil rate bands varies according to the type of transfer.

Question 10

How is the available nil rate band which is available to a transferor get calculated?

Answer 10

It is crucial to look back over the last 7 years of their life to understand how much of the nil rate band has been used, and how much they retain on death.

Question 11

Define property subject to a reservation.

Answer 11

• This prevents people avoiding taxation on property where they part ownership with it but continue to enjoy the benefit.
• The rule therefore applies where the deceased gave away property during their lifetime but did not transferee ‘possession and enjoyment’ of the property, or was not entirely excluded from enjoying the property.

Question 12

What is excluded property in relation to an estate for the purposes of IHT?

Answer 12

Property which is not included in the estate for IHT. An example would be reversionary interest. For IHT, this would mean a future interest under a settlement (eg interest in remainder under a trust created before 22nd March 2006).

Question 13

Explain the basic valuation principle.

Answer 13

Assets in the estate are valued for IHY purposes at price they would ‘reasonably be expected to fetch if sold in the open market’ immediately prior to death.

Question 14

How are quoted shares valued on death?

Answer 14

value is taken from stock exchange official list for the date of death (or nearest taking day). List will quote two prices. to calculate the value for IHT, you take one quarter of the difference between the two prices and add it to the lower price.

Eg prices are 102p/106p.
difference is 4p.
1/4 of 4p = 1p.
102p + 1p = 103p
103p is therefore the value per share for IT purposes.

Question 14

True or False: Liabilities, debts and expenses are deductible for IHT purposes?

Answer 14

True . This will include reasonable funeral expenses.

Question 15

Explain the spouse or civil partner exemption.

Answer 15

Any property included in the estate for IHT purposes is exempt if it passes to the deceased’s spouse or civil partner under their will ,intestacy or by survirioship (ie joint properties). This is a full exemption.

Question 16

Give the exceptions to the spouse/ civil partner IHT exemption.

Answer 16

• Recipient must be UK domiciled (if they are not they will only receive the first £325,000 free from IHT). Alternatively they can choose to be treated as UK-Domiciled for IHT purposes and receive full exemption).
• Does NOT apply to cohabitants however long the relationship has lasted.

Question 17

Explain the charity exemption to IHT.

Answer 17

Property forming part of deceased’s estate for OHT purposes, passing on death to charity is exempt.

Question 18

Explain which assets (under business property relief) will be subject to a 50% reduction in value for IHT purposes.

Answer 18

1) Company shares listed on a recognised stock exchange if transferor has voting control of company immediately before the transfer; and
2) Land, buildings, plant and machinery owned by the transferor personally but used for business purposes by partnership of which transferor was a ember, or by a company (whether private or public) go which the transferor had voting control.

Question 18

Explain which assets (under business property relief) will be subject to a 100% reduction in value for IHT purposes (ie free from IHT).

Answer 18

1) a business or an interest in a business (including partnership share); and
2) Company shares not listed on a recognised sock exchange.

Question 19

What does voting corral mean for the purposes of determining whether assets qualify for BPR (Business Property Relief)

Answer 19

The ability to exercise over 50% of the voted on all resolutions.

Separate shareholdings of spouses or civil partners can sometimes be taken as one, so if combined percentage with transferor gives the couple voting control then the test will be satisfied.

Question 20

Is there a time limit for assets to qualify for BPR?

Answer 20

• Yes - the assets must have been owned for at last 2 years prior to the transfer.
• With regards to property being used by the business, if a replacement is obtained, this will usually count (so the periods of time transferor owned old and new asset will be combined when calculating this period).

Question 21

When will a rate of 36% (as opposed to 40% ) be charged on the part of deceased’s estate not subject to the nil rate band?

Answer 21

When at least 10% of a defined component of a person’s net estate (after deception of other exemptions, relief and available nil rate band) passes to charity.

Question 22

Explain when a nil rate band will pass to the deceased when they survived their spouse.

Answer 22

If deceased died on or after 9th October 2007 having survived their spouse or civil partner, their nil rate band is increased by the amount of the nil rate band not used by the spouse (and can be a maximum increase of 100%).

Question 23

What is the residence nil rate band?

Answer 23

• For deaths occurring after 6th April 2017, there is a residential nil rate band of £175,000, which is available in addition to the normal nil rate band.
• For it to apply, deceased must die owning a qualifying residential interest which is closely inherited.

Question 24

For the purposes of the residential nil rate band (RNRB), define qualifying residential interest.

Answer 24

An interest in a dwelling house which has at any time been the residence of the deceased and forms part of the deceased’s estate.

Question 25

Give the formula to calculate the RNRB for estates over £2 million.

Answer 25

£175,000 - (value of estate - £2 million)
———————————————————- = adjusted RNRB (for estates over £2million
2

Question 25

For the purposes of the residential nil rate band (RNRB), define closely inherited.

Answer 25

For the property to be closely inherited, it must pass to:

1) A child, grandchild or other lineal descendant of the deceased outright or on a certain type of trust (note that lineal descendants are defined as children, step-children, adopted children, foster children, or children where the deceased had been appointed as a guardian);

2) Current spouse or civil partner of the deceased’s lineal descendant’s;

3) Widow, widower or surviving civil partner of a lineal descendant who predeceased the deceased unless such persons have remarried or formed a new civil partnership before the deceased’s death.

Question 26

True or False: A surviving spouse cannot claim their deceased spouse’s unused residential nil rate band.

Answer 26

False.

A surviving spouse CAN claim their deceased spouse’s nil rate band, even if the spouse died prior to 6th April 2017.

Question 27

Explain the downsizing allowance.

Answer 27

If after July 2015, the deceased downsized their property prior to death to a less valuable property (or sold property to move into care), personal representatives can still claim the RNRB the deceased would have been entitled to had the property have been retained. Note the new property downsized to has two be left to lineal descendants.

Question 28

Define potentially exempt transfers (PETs).

Answer 28

Gift made by an individual ro another or into a disabled trust to the extent in either case that the gift would otherwise be chargeable. This theoretically means all lifetime gifts are potentially empt if no immediate emption applies.

Question 29

Does the spousal exemption apply to lifetime gifts?

Answer 29

Yes - so any lifetime git made to a spouse or civil partner will be exempt even if the transferor dies within 7 years of making the gift.

Question 30

List some dispositions excluded from the defition of potentially empt transfers.

Answer 30

• Transfer fr the maintenance, education or training of the transfers child under 18;
• Transfer to the transferor’s child over their age of 18 still undergoing full time education, or training, or for the maintenance of a dependant relative.

Question 31

Explain annual exemptions in relation to lifetime gifts.

Answer 31

• Annual exemption applies to the first 3k transferred by lifetime transfers in each tax year.
• Unused annual exemption from the previous tax year can be carried over (note this only applies to previous tax year).
• The current year’s exemption. must be used before the previous years exemption can be carried over.
• If more than one gift is made that year, the exemption applies to the first gift. any unused exemption is then set against the second gift and any further transfers until it is used.
• Any gifts (or parts of gifts) left will then be potentially empt transfers.

Question 32

What is the small gift exemption?

Answer 32

• Lifetime gifts in any one tax year of £250 or less to any one person are exempt.
• This exemption cannot be set against gifts exceeding £250.

Question 33

List the criteria which need to be met in order for a lifetime transfer to be exempt.

Answer 33

The transfer will be exempt if:
a) it was made as part of transferor’s normal expenditure;
b) it was made out of transferor’s income;
c) after allowing for all such payments, transferor was left with sufficient income to maintain their usual standard of living.

Classic example is a parent gifting child money for purposes of studying at university and helping with living expenses.

Question 34

Summarise the potentially exempt status (ie what will count as potentially exempt transfers).

Answer 34

Any value remaining after exemptions and reliefs have been applied.

Question 35

Explain when a potentially exempt transfer will become a chargeable transfer.

Answer 35

If the transferor dies within 7 years of making the transfer. If they survive this, the transfer will be exempt from IHT.

Question 36

Define liftetime chargeable transfers (LCTs).

Answer 36

• Any lifetime transfers which do not fall within the definition of a PET.
• Main example is any transfer made on or after 22 March 2006 into any trust (other than a disabled trust) or to discretionary trust or company.

Question 37

Explain the rates of IHT applicable to LCTs.

Answer 37

• 0 % on the first £325,000 (the nil rate band);
• 20% on the balance of the chargeable transfer (half the normal IHT rate of 40%).

Question 38

True or False: Chargeable transfers made in the seven years before the current chargeable transfer reduce the nil rate band available to that current transfer.

Answer 38

True. In other words, the value transferred by
chargeable transfers made in the seven years before the current chargeable transfer must be ‘cumulated’ with that transfer (whilst the transferor is alive, any PETs made are ignored for cumulation purposes because they may never become chargeable).

Question 39

Define and explain tapering relief.

Answer 39

Available if the transferor survives more than three years after the transfer.
relief works by reducing the tax on the PET.

The tax is reduced in the following percentages:
a) transfers within three to four years before death - 80% of death charge;
b) 4-5 years - 60%
c) 5-6 years - 40%;
d) 6-7 years - 20%

Question 39

What is a lifetime chargeable transfer?

Answer 39

A transfer made during the transferor’s lifetime into a trust (other than a disabled trust).

Question 40

How do you calculate the amount of tax payable on a lifetime transfer?

Answer 40

• First identify any other lifetime chargeable transfers within the last 7 years.
• If there are any, subtract these from the NRB of 325k.
• the remaining NRB is then free to use against the chargeable transfer being calculated.
• Say the chargeable transfer is 250k, and the previous chargeable transfer was 125k, this would mean 200k NRB is available to use.
• 200k of the current gift would therefore be charged at 0%, with the reining 50% being charged at 20%.

Question 40

Explain how to calculate the tax payable on PETs.

Answer 40

Similar to lifetime chargeable transfer, the cumulative total of transfers preceding the PET needs to be calculated.
This will be made up of:
a) LCTs made in 7 years prior to the PET being assessed (even if the LCT was made more than 7 years before the date of death);
b) any other PETs made during the 7 years before the PET being assessed which have become chargeable as a result of the transferor’s death.

Question 40

IF after NRB and cumulative total, the PET is 90k, what is the amount of tax payable on the PET on this persons death (noting that she died within 6-7 years of the PET)? Assume the deceased used their relevant 3k annual exemption gift allowances.

Answer 40

1) 90k x 0.4 (as it is taxed at 40% given NRB was used up by the cumulative total);
2) 36k x 0.2 (as tapering relief applies at the 6-7years rate - she will only be liable to pay 20% of the overall tax which is 36k);
3) 20% of 36k is £7,200, so this is how much tax its payable on the PET.

Question 41

Explain the estate rate.

Answer 41

Average rate of tax applicable to each item of property in the estate.
This is necessary as:
a) tax on certain types of property (ie land) may be paid in instalments so it needs to be calculated how much related to that piece of land.
b) Pas may not be liable to pay all tax on estate. If estate for IHT purposes includes trust property, trustees are liable to pay the tax attributable to that property.
c) Will may give legacy ‘subject to tax’ so that recipient has the burden of tax relating to that particular legacy.

Question 42

True or False: The PRs are liable to pay the IHT attributable to any property which ‘was not immediately before the death comprised in a settlement’.

Answer 42

True.

This includes:
(a) the property which vests in the PRs (ie the property which passes under the deceased’s will or intestacy); and
(b) property (other than trust property) which does not pass to the PRs but is included in the estate for IHT because the deceased was beneficially entitled to it immediately before death (eg joint property which passes by survivorship).

Question 43

Are PRs liable for IHT payable on settled property at the time of death?

Answer 43

No. The trustees of the settlement are liable for the IHT applicable to that settled property. This means where the deceased was a beneficiary of a trust for example, the trustees are liable for the tax on tat settled property. So is the other beneficiaries (or beneficiaries who become entitled on the death of the transferor).

Question 44

What is the formula to calculate how much tax the trustees of a settlement are to pay?

Answer 44

• First work out value of estate - eg say its 500k;
• Say full NRB is available - 325k is taxed at 0%;
• Remaining 175k is taxed at 40% - meaning there is a 70k tax on the estate.
• Say 300k of the estate was settled in a trust meaning trustees are liable for the tax on the 300k.
• Formula to calculate the tax payable by the trustees on the settled property would therefore be as follows:

                 70,000 300,000 x --------------  = £42,000
                500,000

• In this scenario therefore, the trustees of the trust containing the 300k would be liable for 42,000 of the IHT.

Question 45

Explain the what the value of a deceased person’s share in a house jointly owned is for the purposes of their taxable estate on death (where the house is not owned jointly as spouses).

Answer 45

It will be half of the value of the house, less up to 15%.

Question 46

How are life insurance policies payable to a beneficiary assessed in relation to IHT for the purposes of both the estate and chargeable transfers?

Answer 46

• A life assurance policy for a beneficiary will not form part of a deceased person’s estate for IHT purposes. However it will constitute a PET, chargeable on death at the IHT rate of 40% should the transferor die within 7 years of establishing the policy.
• Life assurance policies that are paid into an estate will form part of the deceased’s estate for IHT purposes (and this will be the maturity value ie the amount paid into the estate at the time of death).

Question 47

Explain the maturity value and the surrender value of a life assurance policy and which figure is used should the policy be counted as a PET chargeable on the death of the transferor within 7 years?

Answer 47

• Maturity value - what the policy has come to be worth.
• Surrender value - the initial capital (amount) put into the policy at the time of assignment.
• The surrender value will be the value of the PET if necessary for IHT calculations, BUT if being counted as part of the estate (ie proceeds are payable to deceased’s estate) the value forming part of the estate will be the amount the policy pays out.

Question 48

How much do the executors of an estate have to pay initially (minimum) to obtain a grant of probate?

Answer 48

The IHT due on all property on which IHT cannot be paid on instalments (ie not subject to the instalment option). For example IHT on property is capable of being paid on instalment but other assets (eg cash in bank accounts) is not).

Question 49

What it the formula for working out the IHT payable to obtain the grant of probate (ie IHT on items not capable of payment by instalment)?

Answer 49

                                                              Total Value of Taxable Estate