IHT

Question 1

IHT can be chargeable on death, but also on certain transfers during lifetime. Trus or False

Answer 1

True

Question 2

What are the 4 rates that apply to IHT

Answer 2

Question 3

Name the 3 different types of transfers

Answer 3

Exempt
Potentially Exempt
Chargeable

Question 4

Transfers exempt from IHT during lifetime:

Answer 4

• Annual exemption -
  
  • £3,000 per tax-year. Can be carried forward if not used. Providing the current tax-years annual exemption used first.
• Small gifts
  
  • £250 per recipient per tax year - cannot be combined with annual exemption.
• Marriage/ civil partnership
  
  • £5,000 to children
  • £2,500 to grandchildren, between spouses
  • £1,000 to anyone else
• Normal expenditure out of income
  
  • cannot be capital distributions i.e. from capital content of PLA and withdrawals from investment bond.

Question 5

Transfers exempt during lifetime and/ or on death - spousal exemption:

Answer 5

• Spousal exemption
  
  • Limited to £325,000 for a non-UK domiciled spouse, unless they elect to be UK domiciled for IHT purposes.
  • An election can be made during lifetime (irrevocable while remaining UK res, though if outside the UK more than 4 consecutive TYs, ceases to apply) - or on death.
  • Can apply from any date within the previous 7 years (covers previous gifts)
  • Election after death must be made within 2 years.

Question 6

Potentially Exempt Transfers (PETs) - key points:

Answer 6

• Lifetime transfer by an individual to:
  
  • another individual
  • bare trust
  • trust for vulnerable person
• No tax at date of gift
• No requirement to report to HMRC
• If donor survives 7 years, gift becomes fully exempt
• Death within 7 years becomes chargeable
• PET valued at date of gift

Question 7

Taper relief - key points:

Answer 7

• 0-3 Years
  
  • 100%
• 3-4 years
  
  • 80%
• 4-5 years
  
  • 60%
• 5-6 years
  
  • 40%
• 6-7 years
  
  • 20%

Taper relief reduces the amount of tax payable, not the value of the transfer.

When PETs become retrospectively chargeable, they use up the NRB - this increases the tax due on the estate

Question 8

Residence nil rate band - key points:

Answer 8

• Introduced 6 April 2017
• Worth £175,000 in 2022/23.
• Available when an individual’s main residence is left to direct descendent (e.g. child, grandchild, spouse/ partner of child/ grandchild).
• Available where individual downsized/ ceased to own home after 7 July 2015 and left assets of equivalent value to direct descendent.
• RNRB is transferable if unused in full on the first death of a spouse or civil partner where 2nd death occurs after 6 April 2017.
• Estates with net value over £2m will see the residence nil-rate band reduced by £1 for every £2 over £m threshold.

Question 9

Potentially Exempt Transfers (PETs) - key points:

Answer 9

• Lifetime transfers made from one person to another, or to a bare trust or a disabled trust
• No need to inform HMRC (though worth making a note of the gifts)
• Becomes fully exempt if the donor survives 7 years
• Chargeable if the donor dies within seven years of making the gift and value of PET exceeds available NRB.
• The value of PET is usually the value at the date of the gift
  
  • If the value has reduced since gift/ wasting asset it is the market value at DOD.
• Taper relief is available

The recipient of PET pays tax due, if refused, the PRs will be asked to pay.

Question 10

Rules behind Interspousal transfers to non-UK domiciles

Answer 10

The current nil rate band is £325,000 and the current non-domicile exempt transfer limit matches that, meaning that £650,000 can be transferred with no IHT to pay.

Question 11

Interspousal transfers, this can be avoided if partner elects to be treated as UK domicile within 2 years of death. What are the wider implications of this?

Answer 11

He/she would be subject to UK IHT on world wide property

Question 12

Why might someone choose a discretionary trust instead of an absolute trust?

Answer 12

If an absolute beneficiary dies the trustees have to look at the will or follow intestacy rules to see who will then benefit. Under a Discretionary trust, it’s up to the trustees to decide who will benefit and when they will benefit from the trust fund.

Question 13

What are the disadvantages of an interest in possession trust?

Answer 13

There are also significant drawbacks in the context of lifetime trusts, which do not offer the same tax benefits as they once did. This is because, since 2006, these types of trusts will be taxed in the same way as discretionary trusts, with lifetime transfers above the settlor’s nil-rate band subject to 20% IHT

Question 14

Who pays tax on an interest in possession trust?

Answer 14

Usually the income will be assessed to tax on the trustees at the basic rates of tax. Trustees are currently subject to income tax at the rates of: -8.75% tax on dividend income; -20% tax on other income, including interest.

Question 15

The treansferable NRB can be used on more than one death but what is the overall limit:

Answer 15

No one person is entitled to more that double the NRB applying at thier date of death. Current maximum is £650,000

Question 16

If a qualifying residential interest is placed into a disretionaty Will trust it will not qualify for RNRB ecept if

Answer 16

the trustees appoint the qualifying residetial interest out to direct descendants within a 2 years the RNRB could be claimed.

Question 17

What are the rules of Tapering of the RNRB

Answer 17

The RNRB is reduced by £1 for every £2 that the value of the estate exceeds the threshold of £2,000,000.

Question 18

hat are the bands for RNRB

Answer 18

Question 19

State who will be liable to pay any Inheritance Tax due, as a result of

Answer 19

The Liability on the PET is payable by the donee (i.e. Julia).
* The liability on the estate is paid by the executors/personal representatives.
* IHT is due 6 months after the end of the month in which James died.

Question 20

State who will be liable to pay any Inheritance Tax due, as a result of James’ death, and when it should be paid to avoid any penalties.

Answer 20

The Liability on the PET is payable by the donee (i.e. Julia).
* The liability on the estate is paid by the executors/personal representatives.
* IHT is due 6 months after the end of the month in which James died.

Question 21

Explain how any Inheritance Tax due, as a result of James’ death, could be met if insufficient liquid assets are immediately available and what the consequences are of delayed payment.

Answer 21

Borrow against the value of assets/use own assets.
* Apply to investment provider/Debt Management Office to use assets to pay IHT
directly to HMRC.
* IHT may be paid by transferring national heritage property (the artwork) to the
Crown.
* It could be paid in instalments over 10 years/10% each year if house is kept and
lived in.
* If it is not paid by the due date interest will be charged/financial penalties.
* In the event that Julia has no assets to settle her liability on the PET, the estate
will become liable.

Question 22

Explain the rules in order for James’ estate to qualify for the Residence Nil Rate Band

Answer 22

• His home must be inherited by his direct descendants i.e. Miles.
• The use of PETs in the years before death have no impact on RNRB qualification.
• It will be protected if James downsizes/stops owning his home provided assets of the
  equivalent value are passed to Miles on his death.
• The RNRB will be tapered as James’ estate has a net value of more than £2,000,000.
• Withdrawal of £1 for every £2 over the threshold i.e. £39,000 so his RNRB is reduced to
  £136,000.
• The amount is £175,000 in 2023/2024.

Question 23

With regard to the discretionary trust set up in May 2015 explain in detail:

the tax treatment on the encashment of the onshore assurance bond; No calculation is required.

Answer 23

The encashment of the investment bond was a chargeable event/chargeable gain of £.
* Subject to Income Tax.
* Tax charge assessed on James as settlor of the trust.
* The bond is deemed to suffer the equivalent of basic rate Income Tax/20%.
* James is subject to a further 25% on the gain as an additional rate taxpayer.
* James can recover this from the trustees/trust

Question 24

With regard to the discretionary trust set up in May 2015 explain in detail the ongoing Income Tax treatment

Answer 24

The trustees are liable for the Income Tax.
* The trust has a standard rate band of £1,000.
* Standard rate of 20% is charged within this on interest.
* Standard rate of 8.75% is charged within this on dividends.
* Above the standard rate band Income Tax is payable at 45%/39.35%.
* Trustees have no personal allowance.
* Expenses are allowable in calculating income chargeable.
* If income is distributed, it is paid with a 45% tax credit which can be reclaimed
depending on the beneficiary’s tax status.

Question 25

With regard to the discretionary trust set up in May 2015 explain in detail the ongoing Capital Gains Tax and Inheritance Tax treatment.

Answer 25

• The trustees/trust are liable for CGT on disposal of OEICs.
• They have an annual exempt amount of £3,000 (1/2 normal exempt amount).
• Above this they are chargeable at a rate of 20%.
• Holdover relief can be claimed on transfer to a beneficiary.
• Discretionary trusts are liable to 10 yearly periodic charges.
• And exit charges on distributions of capital.
• Maximum charge is 30% x 20% = 6%.