IHT Flashcards
Assets included in the taxable estate
- All jointly owned property: D’s share of property is included in taxable estate (even if, as for joint tenancy, it is not in succession estate)
- GROB
- DMC
- Statutory nomination
- Some interests in possession
What is the general rule for asset that fall outside the succession estate for IHT?
These items bear the burden of IHT attributable to them and liability for payment falls on beneficiary of the item
Joint tenant property
Liability on surviving co-owner
Statutory nominations
Liability on nominated beneficiary
DMC
Liability on lifetime donee
Trust assets
Liability on trustees
GROB
Liability on lifetime donee
How is the proportion of IHT due calculated?
The proportion owed by each is calculated with reference to the value of the asset, relative to the value of the whole estate
What is the free estate?
The succession estate assets pass to PRs to be administered under will/intestacy rules
- Assets outside the succession estate do not pass to PRs and pass in accordance with their own rules (the examples just given)
Who is generally liable to pay IHT on free estate?
PRs
- IHT is paid from the residue, unless contrary intention appears in the will
What is the general rule of construction of gifts in a will?
They are deemed to be given free of tax
What is the deadline for submitting the IHT account?
12 months from the end of the month in which the death occurred
What is the deadline for paying IHT due?
6 months from the end of the month in which death occurred, after which interest becomes payable on unpaid tax
Why must PRs submit the account and pay IHT as soon as possible?
The grant will not be issued until information about the estate has been provided to HMRC and IHT has been paid
Payment of interest on unpaid IHT should be avoided
What is the instalment option?
IHT due in respect of certain assets may be paid by 10 equal annual instalments
- First instalment due by usual deadline
- Remaining instalments are due on each subsequent anniversary date
What assets is the instalment option available for?
Instalment option only available in respect of IHT attributable to:
- Land and buildings (includes family home, e.g., if children still live in it)
- Company shares/securities giving D control
- Some unquoted company shares
- Farms or interest in farming business
- Business or interest in business
- Timber
What is quick succession relief?
It’s a 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 transfer
QSR applies where a person dies and:
- death estate includes assets received by gift or inheritance
- in the 5 years before their death
- those assets were subject to IHT
Example: A man dies, leaving the whole of his £1,000,000 estate to his brother. Two years later, his brother also dies, leaving everything to his daughter.
- the second estate benefits from quick succession relief
Five years before his death, a man set up a lifetime discretionary trust which includes him and his spouse in the class of beneficiaries.
What is the position of this trust on the man’s death?
The gift into the trust fund will be included in the man’s taxable estate but not his estate for probate purposes.
- The payment into the trust was a GROB
- Value of trust fund is included in man’s estate for IHT purposes
What is the charity exemption?
- All transfers to charities are exempt (100% exemption)
Leaving estate to charity:
- a reduced rate of IHT (36%) is available where the deceased leaves at least 10% of their estate to charity
Life interest trust:
A woman has died and her executors are applying for a grant of probate. The woman has a number of assets, including a life interest in a trust, which she has held since 2000, which will now pass to the remaindermen.
What is the position with regard to inheritance tax on the woman’s estate?
The value of the life interests in the trust is included in the assets for the estate for IHT purposes
What is the IHT position on premiums paid on a life assurance policy?
The premiums on the policy are potentially exempt transfers but would be regarded as normal expenditure out of income
Example of grossing up
A woman transfers assets into a discretionary trust in favour of family members, including her husband who becomes a beneficiary on her death. The instrument of transfer describes the gift as ‘free of tax’.
- The woman is liable for the payment of tax and the gift will be grossed up to reflect the loss to her estate
For purposes of calculating IHT on death estate (step 4), what debts/expenses can be deducted?
- Deceased’s debts/liabilities due at the date of the death. This is money that the deceased owned (outstanding debts as of date of death)
- Post death expenses - the only deductible post-death expenses for IHT are reasonable funeral expenses and cost of tombstone
Other post-death expenses (e.g., lawyer’s fees or administrator’s valuation of assets fees) are NOT deducted for IHT
- but may be paid using estate assets
When will Quick Succession Relief not apply?
QSR is applied to IHT due, not the estate value. If QSR exceeds IHT, the tax is reduced to zero.
Does not apply:
- where earlier transfer to deceased falls under exemptions (e.g., spousal/charity)
- when it was chargeable but the tax was not paid because it was below the threshold
- if not IHT was payable on deceased’s death
- if transfer occurred more than 5 years before death of first donor
Unused QSR is lost and cannot be transferred or applied elsewhere
Deceased owned property as a tenant in common
This share passes into the deceased’s estate for BOTH tax and distribution purposes
- part of taxable and succession estate
Deceased owned property as joint tenant
Distribution and tax position are considered separately
- survivorship applies for distribution - passes to surviving joint tenant
- deceased’s share of the property as joint tenant is included in taxable estate
Assets excluded from the taxable estate
- Excluded property: remainder interest in life trust - life tenant is still alive, remainder interest NOT subject to IHT
- Insurance policies written in trust for third party
- Discretionary pension scheme payments
What is the general value for valuing the taxable estate
Assets are valued at market value at the date of death
What is the rule for how joint property is valued?
Where land is co-owned by individuals who are not married
- the value of the deceased’s share is reduced by 10% to reflect the fact the property is co-owned
- deduction does not apply where co-owners are married
What is grossing up?
If trustees do not pay the tax - the donor is liable
- If donor pays IHT using their own funds - their loss = assets settled + IHT liability
- IHT payable is calculated with reference to grossed-up value
