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Wills And Estates > Iht Avoidance > Flashcards

Iht Avoidance Flashcards

1
Q

What is tax avoidance?

A

The efficient and lawful arrangement of a client’s affairs in a manner which minimises their liability to tax.

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2
Q

What is aggressive tax avoidance?

A

A form of tax avoidance involving complex or artificial arrangements that reduce tax liability, complying with legislation but not reflecting the law’s intention.

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3
Q

What is tax evasion?

A

Where a taxpayer withholds information about assets or income, or takes steps to avoid paying the tax they are liable for. This is unlawful.

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4
Q

What are the anti-avoidance rules relevant to inheritance tax (IHT)?

A

They include:
1. Restriction on deduction of loans for IHT purposes
2. Gifts with reservation of benefit (GROB) rules
3. Pre-owned assets charge (POAC)
4. General anti-abuse rule (GAAR)
5. Disclosure of Tax Avoidance Schemes (DOTAs)

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5
Q

What is the restriction on deduction of loans for IHT purposes?

A

Debts can be deducted from the deceased’s estate for IHT purposes, but there are restrictions on loans made for certain purposes.

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6
Q

What happens if a loan is made to acquire assets qualifying for BPR?

A

The costs of the loan must first be set against the value of the qualifying assets, reducing the relief available.

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7
Q

When can unpaid loans be deducted from the value of the estate?

A

Loans can only be deducted if they are repaid from the estate.

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8
Q

What are the GROB rules?

A

GROB rules prevent individuals from manipulating the IHT regime by giving away property while retaining a personal benefit in that property.

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9
Q

When do the GROB rules apply?

A

A lifetime gift is treated as a GROB if the donee does not assume bona fide possession or does not enjoy the property to the exclusion of the donor during the relevant period.

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10
Q

What is bona fide possession under GROB?

A

The donee must obtain a vested, beneficial interest, have actual enjoyment of the property, and assume possession at the start of the relevant period.

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11
Q

What is the effect of reserving a benefit under GROB?

A

If the GROB subsists at the donor’s death, the property is treated as part of the donor’s estate for IHT purposes.

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12
Q

What is the pre-owned assets charge (POAC)?

A

An annual income tax charge on individuals who give away property but subsequently obtain a benefit from it.

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13
Q

What types of property does the POAC apply to?

A

The POAC applies to land, chattels, and intangible property held in a settlor-interested trust.

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14
Q

What are the conditions for land to be subject to POAC?

A

An individual must occupy the land, and either the disposal condition or contribution condition must be met.

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15
Q

What is the general anti-abuse rule (GAAR)?

A

Enacted in Finance Act 2013, GAAR counters aggressive tax avoidance arrangements contrary to the spirit of tax law.

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16
Q

What is the GAAR?

A

The General Anti-Abuse Rule (GAAR) was enacted in Finance Act 2013 to counteract aggressive tax avoidance across various taxes, not just IHT.

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17
Q

What does HMRC guidance indicate about the GAAR?

A

It is intended to catch arrangements that are contrary to the spirit of tax law, exploit loopholes, or involve artificial arrangements aimed at avoiding tax.

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18
Q

What must a taxpayer do if arrangements are caught by the GAAR?

A

The taxpayer must make ‘just and reasonable’ adjustments to counteract the abusive effect of the arrangements.

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19
Q

What penalty is imposed under the GAAR?

A

A penalty of 60% of the counteracted amount is payable.

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20
Q

Can HMRC decisions on the GAAR be reviewed?

A

Yes, HMRC decisions may be referred to an independent GAAR Advisory Panel for determination.

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21
Q

What conditions must be satisfied for the GAAR to apply?

A
  1. An arrangement gives rise to a tax advantage.
  2. The tax advantage relates to a tax to which the GAAR applies.
  3. The arrangement satisfies the ‘main purpose’ test.
  4. The arrangement is abusive.
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22
Q

What is DOTAS?

A

The Disclosure of Tax Avoidance Scheme (DOTAS) was introduced in the Finance Act 2004 as a reporting regime for potentially unacceptable tax avoidance arrangements.

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23
Q

Who has duties under DOTAS?

A

Primarily ‘promoters’ of arrangements, including legal advisers, must inform HMRC about notifiable arrangements.

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24
Q

What happens once HMRC is informed under DOTAS?

A

HMRC may allocate a scheme reference number to notifiable arrangements, which promoters must provide to parties involved.

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25
Q

What are the penalties for non-compliance with DOTAS?

A

Penalties apply for failure to comply, but non-compliance is not a criminal offence.

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26
Q

What conditions make arrangements notifiable under DOTAS?

A
  1. Arrangements fall within descriptions prescribed by HM Treasury.
  2. Arrangements enable obtaining a tax advantage related to a relevant hallmark.
  3. The main benefit is obtaining the identified advantage.
27
Q

What are the conditions for the IHT hallmark under DOTAS?

A
  1. The main purpose is to obtain specific advantages regarding IHT.
  2. The arrangements involve contrived or abnormal steps without which there would be no tax advantage.
28
Q

What are key IHT anti-avoidance rules?

A
  1. Restriction on deduction of loans for IT purposes.
  2. Gifts with reservation of benefit (GROB rules).
  3. Pre-owned assets charge (POAC).
  4. General anti-abuse rule (GAAR).
  5. Disclosure of Tax Avoidance Schemes (DOTAS).
29
Q

What are the two kinds of exempt beneficiaries for HT purposes?

A

The two kinds of exempt beneficiaries are the spouse/civil partner of the deceased and charities.

30
Q

What should clients be made aware of when drafting a will regarding exempt beneficiaries?

A

Clients should be made aware of the exempt status of these beneficiaries as it may impact the drafting of their will.

31
Q

What is a key consideration when advising clients about gifts to charities in their wills?

A

You must establish whether the organization meets the qualifying criteria for HT charity exemption.

32
Q

What happens if a legacy to a charity fails due to poor drafting?

A

If the legacy fails due to poor drafting, no IHT relief can be claimed.

33
Q

How can a testator increase the amount of a charitable gift without reducing the non-exempt beneficiary’s share?

A

The increase in the legacy amount can be offset by the tax saving made by the lower tax rate.

34
Q

What are the two main types of assets that may qualify for IHT relief?

A

The two main types of qualifying assets are Business Property and Agricultural Property.

35
Q

What is the minimum ownership period for qualifying assets to receive IHT relief?

A

Qualifying assets must have been owned by the deceased for a minimum of 2 years prior to death.

36
Q

What is the tax implication of making a specific gift of qualifying assets to an exempt beneficiary?

A

BPR and APR will be wasted if a specific gift of qualifying assets is made to an exempt beneficiary.

37
Q

What is a possible solution for a testator who wants to leave qualifying assets to a spouse?

A

The testator can make a specific gift of the qualifying assets to a discretionary trust and claim BPR or APR.

38
Q

What is the basic principle regarding gifts to exempt beneficiaries?

A

All gifts to exempt beneficiaries are made free of IHT, meaning they should receive their inheritance without IHT costs.

39
Q

What does ‘using’ the NRB on death refer to?

A

‘Using’ the NRB on death refers to making transfers to non-exempt beneficiaries that are taxed at 0% on the value within the NRB.

40
Q

What is a formula clause in the context of NRB gifts?

A

A formula clause specifies a gift equal to the value of the nil rate band available on the date of death.

41
Q

What is a ‘will trust’?

A

A trust created on death by a testator’s will is referred to as a ‘will trust’.

42
Q

Who are the legal owners of the assets in a trust?

A

The trustees are the legal owners of the assets in a trust.

43
Q

What happens if a specific gift of property is made to beneficiaries?

A

If the property is part of the residue, it complicates the application of the residence nil rate band.

44
Q

What should be considered when drafting a gift of the nil rate band?

A

The wording of the clause should clarify whether it includes or excludes any transferred or residence NRB.

45
Q

Can a testator add assets to a pre-existing trust?

A

Yes, a testator can add assets to a pre-existing trust by identifying the trust in their will.

46
Q

What is a trust created on death by a testator’s will called?

A

A trust created on death by a testator’s will is referred to as a ‘will trust’.

47
Q

What is the role of the testator in a will trust?

A

The testator is the settlor of the trust.

48
Q

When does a will trust come into existence?

A

A will trust comes into existence on the date of the testator’s death.

49
Q

What is required for drafting a will that creates a trust?

A

Express wording is required to set out the terms of the trust, appoint trustees, identify beneficiaries, identify which part of the estate the trust applies to, and set out the scope of the trustees’ powers.

50
Q

What is a discretionary trust?

A

A discretionary trust is for the benefit of a group of beneficiaries, none of whom have fixed rights to trust assets, and the trustees have absolute discretion over distributions.

51
Q

What is a life interest trust?

A

A life interest trust benefits a life tenant during their lifetime and a remainderman after the life interest ends.

52
Q

What are trusts for young people and bereaved minors?

A

These trusts benefit the testator’s children.

53
Q

What are trusts for disabled people?

A

Trusts that provide for individuals with physical or mental disabilities.

54
Q

What happens when a beneficiary of a discretionary trust dies?

A

The beneficiary’s taxable estate does not include the trust assets.

55
Q

What is a discretionary trust of residue?

A

It is a trust where the whole or part of the residuary estate passes to a discretionary trust, and the exact amount is determined after administration.

56
Q

What is a legacy to a discretionary trust?

A

A fixed sum or a sum equal to the nil rate band passes to a discretionary trust, and the amount is numerically certain.

57
Q

Does the residence nil rate band apply to discretionary trusts?

A

No, the RNRB does not apply if the deceased’s residential interest passes to a discretionary trust.

58
Q

What are the benefits of a discretionary trust?

A

Flexibility in distribution and protection of assets from creditors or divorce claims.

59
Q

What is a 2-year discretionary will trust?

A

A trust intended to last for two years following a testator’s death, allowing trustees to decide distributions for IHT purposes.

60
Q

What tax advantage does a life interest trust provide?

A

Spouse exemption can be claimed if the testator’s spouse is the life tenant.

61
Q

What is a key practical advantage of a life interest trust?

A

The testator can control the ultimate destination of their estate while providing for the life tenant.

62
Q

What should be considered regarding the life tenant’s needs?

A

The life tenant’s needs should equal their resources plus trust income.

63
Q

What happens if a life tenant’s needs exceed their resources?

A

Options include making the trust fund larger or ensuring trustees have powers to advance capital or make loans.

64
Q

What is the summary of creating trusts in a will?

A

A testator may create or add to an existing trust, with discretionary trusts offering flexibility and life interest trusts providing control over estate distribution.

Wills And Estates (7 decks)

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