IHT Flashcards
Steps for calculating
- Identify transfer of value
- Find the value of the transferred
- Apply any relevant exemptions and reliefs
- Calculate tax at appropriate rate
3 circumstances it arises
- On death estate
- PETs-lifetime gifts to individuals
- LCT-transfers to trusts/companies
What is the ‘estate’ on death for IHT purposes
All prop deceased beneficially entitled to immediately before death, including property :
i) Passing under will/intestacy
ii) which deceased beneficially entitled to
iii)included because of statutory provisions
What is included in the estate for IHT purposes because of statutory provisions
i. Certain trust property: Where entitled to income, whole trust fund is taxed as if part of Bs estate (B has ‘qualifying interest in possession’)
ii. Property given away during lifetime but subject to a reservation at time of death
(Ie. Where still retain possession and enjoyment of prop/not entirely excluded from enjoying the property)
What is NOT classed as ‘estate’ on death
Where not beneficially interested in prop immediately before death :
1. Life insurance on trust for named beneficiary
2. Lump sum from pension to deceased’s fam
Excluded property: A remainder interest in a trust where the life tenant is still alive (whoevers getting income from the trust pays the tax)
What is a PET
Any gift made by individual to another individual or into a disabled trust
EXCEPT
◊ for maintenance, education or training of their kids under 18 or over 18 if in full time ed/training
◊ For maintenance of dependent relative
Is a PET chargeable to IHT?
Not chargeable when made, if transferor dies within 7y,becomes chargeable and transferee will be liable
What is a LCT
transfer to company/trust (unless trust for disabled person)
Is a LCT chargeable to IHT
Chargeable when made
On death, will need to recalculate:
-If more than 7y from death, NOT RECHARGEABLE
-If in 7y pre death recalculate and , trustees liable for extra
What is the ‘value transferred’ for the death estate?
Open market value of assets in death estate LESS debts and reasonable funeral expenses
◊ land held as JT NOT with spouse reduced by:
10% for commercial prop
15% residential prop
How are shares valued for the ‘death estate’?
Quoted shares-value taken from Stock Exchange Daily Official List for date of death/nearest trading day (quotes 2 prices)
To value, take 1/4 of difference between lower and higher price and add to lower price
What is the ‘value of the transferred’ for a PET?
Amount of reduction of transferors estate
Estate=aggregate of all prop they’re beneficially entitled
Related prop rules-prop transferred between husband/wife treated as part of same group =deemed to own half of joint value
What exemptions and reliefs are available for both death and lifetime transfers?
- Spouse/civil partner exemption : Transfer 100% exempt if to spouse/civil partner
- Charity exemption of 100%
- Business property relief
- Agricultural relief
when does business property relief apply?
Where business is:
‘trading’-selling product/service (as opposed to dealing with investments/land)
For quoted shares (on stock exchange), must have voting control
Transferor must have owned assets for 2y OR assets must be replacement for relevant business prop where combined period of ownership is 2y (if inherited from spouse, deemed to have owned from date it was originally acquired by deceased)
What is the effect of business property relief
100% for relevant business property – Business or interest in business
– Co shares not listed on recognised stock exchange
50% for any other relevant business property
– co shares listed on recognised stock exchange if transferor had voting control of co immediately prior transfer
– Land, buildings, machinery, plant owned by transferor but used for business purposes of partnership (which member of) or co (which had voting control 50% (inc. spouse))
Effect of agricultural relief?
◊ 100% where:
transfer had the right to vacant possession immediately before transfer
OR prop was subject to a letting commencing on/after 1 Sept 1995
50% in other cases
Conditions for Agricultural relief to apply
◊ Prop was occupied by transferor for purposes of agri for 2y prior to transfer
◊ OR prop was owned by transferor for 7y prior and was occupied by someone throughout that period for the purposes of agriculture
What extra reliefs and exemptions are only available for lifetime transfers (PETs/LCTs)
- Annual exemption
- Small gifts
- Normal expenditure out of income (ie. To kid at uni)
- Gifts on marriage
What is the effect of the annual exemption?
First £3k transferred in each tax year exempt
Unused can be carried forward 1y (current year must be used first)
What is the effect of small gifts exemption
Of less than £250 to one person exempt
What is the effect of Normal expenditure out of income (ie. To kid at uni) relief
Exempt if:
Made as part of normal expenditure
Out of transferers income
After, left with sufficient income to maintain usual standard of living
Exempt up to
£5k by parent
£2.5k by remoter ancestor
£1k in any other case
Value remaining after will be chargeable if transferor dies within 7y
2 steps for calculating tax at the appropriate rate (step 4)
- Cumulate NRB
- Apply rate of tax
- For PET/LCT Apply relief to tax: taper relief
What is cumulation
If another chargeable transfer made within 7y before current one, this reduced the nil rate band available to that current transfer (must be cumulated with current one)
=lifetime transfers use up NRB first, reducing amount available to estate
What is a PETs cumulative total made up of?
i) LCT made in 7y before this PET
ii)Other PET made in 7y before this PET which have become chargeable as a result of death
What is a LCTs cumulative total made up of?
i) Other LCTs made in 7y before this LCT
ii) Any PETS made in 7y before this LCT which have become chargeable as a result of death
What are the rates of IHT
0% -Nil rate band/ Residence nil rate band
40%-rest
36%- for charity
What is the NRB
First £325,000 at 0%
What is the RNRB?
£175,00 at 0%
When does the RNRB apply?
- Dies owning a qualifying residential interest (interest in dwelling house which they’ve lived in and forms part of estate)
- Which is closely inherited
issue inc. foster, adoptive, step, guardian
Current spouse of lineal descendent
Widow/er of lineal descendent unless remarried before deceased’s death
When is the RNRB adjusted
Estate more than £2mill, RNRB reduced by £1 for ever £2 over £2mill
How to calculate the adjusted RNRB
£175,000
LESS
(value of estate LESS £2mill) DIVIDED BY 2
What is the downsizing allowance
Where deceased downsized/sold to move to care home, can still claim RNRB on prop if it would have qualified, replacement prop of similar value left to lineal descendants
Rates of IHT on LCT when made
0% on first £325k (nil rate band)
20% on balance of chargeable transfer
LCTS when recalculated on death-subtract IHT already paid (no refund if more)
What is taper relief for PETs/LCTs?
Tax on death charge reduced in following %…
(a) transfers within 3-4y pre death: 80%
(b) transfers within 4-5y pre death: 60%
(c) transfers within 5-6y pre death: 40%
(d) transfers within 6-7y pre death: 20%
What is the estate rate
average tax applicable to each item of property in the estate
Tax divided between assets proportionately according to value
Estate rate-average tax on estate as %
How to calculate the estate rate
Total tax bill DIVIDED BY total chargeable estate
TIMES 100
Who is primarily liable for IHT on PETS?
Transferee
When to PRs become liable for IHT on PETS?
PRs become liable if tax remains unpaid 12mo after end of mo of death
Who is primarily liable for IHT on LCTs
Transferor
BUT HMRC can also claim from trustees
Who has the burden of IHT on estate
Can be chosen by transferor:
On transferees
Out of residue of estate
If will silent, at testamentary expense
When is IHT due
6mo after end of month of death
What happens if IHT is not paid in time?
Interest runs on outstanding amount
What IHT can be paid in instalments
Land
Business/ business interest
Shares (quoted or unquoted) which gave control of co immediately before death
Unquoted shares which do not give control if:
◊ Holding is at least 10% nominal value of Co shares AND worth more than £20k
◊ OR HMRC satisfied tax cant be paid in 1 sum without undue hardship
◊ OR IHT attributable to shares and any other instalment option property in the estate amounts to at least 20% of the IHT payable on the estate.
Time limit for paying LCTs at time of transfer
Made after 5 April and before 1 Oct, due 10 April following year
Not between these dates- due 6mo after end of no LCT made
Time limit for paying LCTs following death within 7y
Due 6mo after end of mo of death
Instalment option available
What do you check if you can deduct from a PET
ANNUAL EXEMPTION!!!!
