IHT Calculations Flashcards
IHT trigger events?
- Potentially exempt transfers – lifetime transfers of value which could become chargeable to IHT if transferor survives for seven years after transfer if does not then are chargeable
- Lifetime chargeable transfers – immediately chargeable at lifetime rate
- Death – IHT is chargeable on this transfer of value
o A chargeable transfer is a transfer of value made by an individual which is not an exempt transfer
o It’s a disposition which results in an immediate decrease in value of individuals estate
o This means gifts broadly,
o The value depends on the trigger event
o For lifetime transfers - it is assessed by loss in value to the donor
o For the death estate the value is calculated by reference to market value of items in estate on date of death s160 IHTA
Nil rate band?
Nil rate bands
Individuals have a basic nil rate band of £325,000 – transfers at 0%
Additional nil rate band 175,000 for individuals who die on or after 6 April 2017 if they leave home to a direct descendent. Residence nil rate band.
An individual’s surviving spouse or civil partner can inherit unused portion of their RNRB
Potentially exempt transfer? and LCT?
PET is a lifetime transfer of value to another individual – if does not survive 7 years It becomes chargeable alongside death estate
- NOT CHARGAEBLE at point it is made
- Becomes FULLY EXMEPT if lives longer than 7 years
Lifetime chargeable transfer
All lifetime transfers of value made by a person into A TRUST will give rise to an LCT.
- IHT is payable on chargeable value at lifetime rate of 20% if more than nil rate band
- If transferor survives 7 ears there will be no further charge
- Other will be reassess at death rate 40% with reference to the NRB at date of death
DEATH
- S4 IHTA there is a deemed transfer of all assets – it’s this that gives rise to IHT
- Property is sold at value it might reasonably be expected to fetch if sold on open market immediately before death s160 IHTA
Cumulation?
- Used to prevent individuals reducing or avoiding an IHT liability by making a series of separate dispositions HMRC considers other chargeable transfers made in seven years prior and cumulates it for a cumulative total.
- The effect of which reduced the NRB available
Reduces NIL RATE BAND
- Identify of value transferred
- If cash is transferred or market value
- Grossing up
Apply exemptions and reliefs
- That GIVES YOU THE CHAREGABLE VALUE
Apply nil rate band – think about cumulative total
- That reduces the nil rate band
- Anything above
Re-assessed transfers?
Failed pet
Taper relief only applies if there was tax payable on the lifetime gift
Calculate lifetime transfers?
- Calculate cumulative total
- Identify value transferred
- Apply exemptions and reliefs
- Appy NRB and calculate tax
- Apply taper relied
- Give credit for tax paid in lifetime
(Last two only apply when IHT is being calculated after death)
Calculating IHT on death estate?
- Calculate cumulative total
- Identify assets included in taxable estate
- Value the taxable estate
- Deduct debts/expenses
- Apply exemptions and reliefs
- Apply RNRB
- Apply basic NRB and calculate tax
Transfer of nil rate band?
Individuals would often try to make most of both NRBS by leaving a portion of their estate to other family members or setting up trusts known as nil rate band trust – these are discretionary trusts which cover amount of NRB and include the surviving spouse as a potential beneficiary. This allows the survivor to benefit without trust property forming part of estate for IHT purposes.
TNRB allows a surviving spouse to take advantage of unused portion of deceased’s base NRB
How TRNB works
- If a married individual dies and some or all of their NRB remains unused the PRs of surviving spouse can claim an increase if survivors NRB equal to unused percentage of first spouse.
- This is equal to percentage of the NRB sum so if increased will equal more.
When outliving multiple spouses – spouse can claim TNRB in relation to all of them. But tis capped at 100% so £325,000
TNRB: making a claim
- No claim needs to be made when the first spouse dies
- PRs of surviving spouse must make a claim for the TRNB in the IHT return within two years of the end of the month of death if they fail to do so anyone else who is liable to pay IHT on surviving spouses’ death can make the claim after the deadline for PRS to make the claim.
Residence nil rate band?
3 conditions
- Deceased died on or after 6 April 2017
- Their death estate included a qualifying residential interest (QRI)
o
- The QRI was closely inherited by a direct descendant.
Full amount is 175,000
There is no RNRB available at all for net estates worth £2,350,000 or more (or £2,700,000 where a full transferred RNRB applies).
What is a QRI?
A QRI is a residential property interest is an interest in a dwelling-house which the deceased occupied as their residence at some point during their ownership
- Includes property in which deceased did not live but intended to do so in dude court
- Does NOT include rental investments properties in which the deceased never lived
Meaning of closely inherited
- If receive QRI by a gift under the will
- Operation of the law of intestacy
- Operation of rules of survivorship
Meaning of direct descendants
- Deceased’s children, grandchildren, great grandchildren and other lineal descendants
- Spouse or civil partner
Transferring unused RNRB
- Relevant when the survivor of a married couple is and their pre-deceased spouse did not use their own RNRB
- Can only be sued if surviving spouse leaves a QRI to a direct descendent
Downsizing ?
- Broadly, to qualify:
- the deceased must have given away their QRI or downsized to a less valuable QRI on or after
- July 2015 (i.e., have lost the benefit of the full RNRB)
- the former home would have been a QRI if it had been retained
- a direct descendant inherits the replacement QRI and/or other assets
- The amount of the addition is calculated with reference to the amount of the RNRB which would
- otherwise, be lost because the former QRI is no longer owned (or a less valuable QRI has taken its
- place).
- A claim for the downsizing addition is made by the PRs within 2 years of the end of the month of
- death, not when the sale/gift of the former home takes place. However, details of the lifetime
- sale/gift will be needed by the PRs to bring the claim.
Lifetime transfer calculation?
- Step 1 – calculate cumulative total - chargeable value of transfers in 7 years today
- Step 2 – identify value transferred
- Step 3 – apply exemptions and reliefs
o Spouse exemption
o Charity exemption
o Family maintenance exemption
o Annual exemption (3,000 per tax year) any previous years AE which was not used can also be claimed.
o Small gifts allowance
o Normal expenditure from income
o Marriage exemption
o Business property relief
o Agricultural property relief
o Taper relief - Step 4 – apply NRB and calculate tax – RNRB never applied to lifetime transfers
- The NRB amount applicable to an LCT is the NRB amount at date of death
- NRB that applies to a failed PET or re-assessed LCT is the NRB at the date of death.
- Step 5 and 6 – Reassessed transfers – these transfers do not form part of the death estate – the tax payable on failed PET must be calculated separately.
- Step 7 – Taper relief
- Step 8 – giving credit for tax paid in lifetime – deduct any IHT paid in lifetime
IHT death estate calculation?
Seven steps
- Calculate cumulative total
- Identify assets included in taxable estate
- Rules determining the property included for tax purposes
- General rule is that all property to which deceased was beneficiary entitled to at the date of death
- All jointly owned property – even though it passes through survivorship for IHT purposes there is a deemed severance of the joint tenancy immediately before death, so their share will be included in taxable estate.
- A testator’s estate consists of: * House in sole name: £300,000 * Chattels (joint tenants): £8,000 * Cottage (tenants in common in equal shares): £200,000 The succession estate is worth: £300,000 (house) + £100,000 (1/2 cottage) = £400,000. The chattels pass by survivorship. The taxable estate is worth: £300,000 (house) + £4,000 (half chattels) + £100,000 (1/2 cottage) = £404,000
- Property subject to reservation – if a person gives an asset away but derives a benefit then it will be included in IHT estate
- Donations mortis causa – a lifetime gift conditional on death – also included in deceased’s estate
- Statutory nominations - DO NOT ENTER distribution estate but DO form IHT estate
- Excluded property
- A remainder interest in a life interest trust -if the remainderman of a life interest trust died before the life tenant the trust fund that would have passed to them is not included in remainderman’s taxable estate. In contrast where a life tenant dies the value of the trust fund may be included in their taxable estate.
- Insurance policy written on trust – if deceased had an insurance policy on their own life where the sum payable on death was written in truth for another the proceeds of policy are not included in deceased’s estate for IHT purposes. If the proceeds were payable to deceased’s estate, then the amount would be included in taxable estate.
- Discretionary pension schemes -
- Value the taxable estate – valued at the date of death
- Joint property – where land is co-owning - tenants in common - the value of deceased’s share is reduced 10 -15% to reflect difficulty of selling a share of property rather than whole. DOES NOT APPLY when co-owners are married. - Deduct debts/expenses
- Deceased’s debts and liabilities due at date of death
- Post death expenses are reasonable funeral expenses and cost of tombstone - Apply exemptions and reliefs
- For this workbook only
- Spouse exemption
- Charity exemption
- Business property relief
- Agricultural property relief - Apply RNRB
- Establish RNRB available
- Apply a rate of 0% to the value of the taxable estate up to the total RNRB amount - Apply basic NRB and calculate tax
- Same as stage 6
Liability and burden of IHT?
LCT – during lifetime
- General rule is person in whom the assets vest is usually liable to pay IHT – for an LCT that will be trustees of the trust which receives the assets.
Lifetime transfers taxed following death –
- General rule – lifetime recipient is liable to pay IHT due
Taxable death estate
- May contain items that are excluded from their succession estate
Death – free estate
- IHT on the free estate is a general testamentary and administration expense
- Deceased’s Prs are liable to pay this tax
- IHT is paid from residue unless a contrary intention appears in the will
- General rule is that IHT is payable from residue unless a contrary intention is shown
Exemptions available for lifetime ONLY?
Annual exemption
Family maintenance
Small gifts
Marriage exemptions
Normal expenditure out of income
Taper relief
Available on death only?
Woodlands relief
Quick succession relief
Available for BOTH life and death?
Spouse
Charity
Business property relief
Agricultural property relief
Political party exemption
National heritage
Employee benefit trusts
Housing associations
Lifetime exmeptions - DETAILS?
Annual exemption s19 IHTA
- Allows you to make gifts of up to 3000 a year tax free
- Applied chronologically to transfers
- Maximum of 2x AE so only the previous year
Family maintenance
- Spouse
- Minor child for maintenance, education or training or over 18 and in full time education
- A dependent relative to make reasonable provisions for their care
Marriage exemption s22
A gift given in consideration of a marriage to a party of that marriage is exempt up to: * £5,000 if made by a parent of one of the parties * £2,500 if made by one party of the marriage to the other * £2,500 if made by their remoter ancestor e.g., grandparent or great-grandparent; and * £1,000 in any other case. CANT PAY FURTURE CHILD IN LAW AS WELL AS OWN CHILD
Relief applies per donor –
Normal expenditure out of income s21
- Its exempt if made
- From donors’ income nor capital
- As part of a normal/regular patter of giving
- Does not affect donor’s standard of living
Taper relief – ONLY APPLIES AFTER DEATH
- APPLIES TO TAX LIABILITY – so IF THERE IS NO TAX LIABILITY FOR A CERTAIN GIFT NO TAPER RELIEF APPLEIS
– to apply both of following conditions need to be met
- A life time transfer was made 3-7 years prior to transfers death
- IHT is payable in respect of lifetime transfer
Taper relief
0-3 years - 100% payable
3-4 years - 80% payable
4-5 - 60%
5-6 - 40%
6-7 20%
Exemptions life and death details?
Spouse exemption s18
- Completely exempt
- Provided both live in UK
- Have to be married
- Does not apply if they receive a remainder interest – so names as remainder beneficiary
Charity exemptions s23
- All transfers to registered charities are exempt irrespective of amount
Other exemptions
Political party exemption s24
- Party has at least two MPs elected
- Party has least one MP and at least 150,000 votes given to candidates representing that party
Gifts of land to housing associations s24
-
Gifts for national purposes s25
- Bodies in schedule 3 which are covered by the exemption
Gifts to heritage maintenance funds s27
- These are trusts which maintain historic buildings or land of scenic, scientific and historic interest
Gifts to employee benefit trusts s28
Reliefs lifetime and death? BPR?
BPR
Qualifying business assets
- Unquoted shares
-Quoted shares - in stock exchange
-Business or interest in business
-Asset owned by taxpayer used for business
Investment assets
- Not business property if business concerned consists wholly or mainly of:
- Dealing in securities, stocks, or shares, land or buildings
- Making or holing investment
To qualify
- Transferor must have owned business assets continuously for at least 2 years
- Following are exceptions to two-year rule
- If qualifying assets are sold and replaced with new qualifying assets – treated as continuous
- If a person inherits business assets following someone’s death – deemed to acquire assets on date of death
- If a person inherits business assets following the death of their spouse deemed to have owned from time it was originally owned.
BPR and lifetime transfers
When transferor makes a PET or LCT of qualifying business asset and this transfer is assessed to IHT following death of transferor within 7 years, BPR is only available for their lifetime transfer. If:
- Owned by transferee
- Qualifies for BPR when transferor dies
- There are no minimum ownership requirements
Agricultural property relief? LIFETIME AND DEATH?
Agricultural property includes:
* Agricultural land and buildings: used for purposes connected with agricultural activity
* Farmhouses and cottages: may qualify if they are of a ‘character appropriate’ to the
associated agricultural land and have been occupied for the purposes of agriculture e.g.
farmhouse occupied by a farm worker or their surviving spouse and not someone who
occupies for purely domestic reasons.
Qualifying property must have been:
* occupied for agricultural purposes by the transferor throughout the two years immediately
before the transfer, or,
* owned by the transferor and occupied by them or another for agricultural purposes
throughout seven years immediately before the transfer.
Rates of relief – 100% available if transferor was owner occupier or property was let on a tenancy beginning.
50% applies less frequently and on tenancies created before September 1995
Exemptions death estate?
Only apply to death estate and not available for failed PETS or LCTS
Woodlands relief s125 IHTA
- Gift of woodland following death may qualify for woodlands relief
- If deceased had purchased woodland must own it for 5 years before death for relief to apply
- If deceased had inherited woodland following someone else’s death NO qualifying period of ownership
- This relief is aa deferral of IHT
- To use deferral – those administering estate should make an election to exclude the value of the woodland from the death estate.
- Value of the woodland is value of the trees – not land itself
- Tax is deferred until the timber not the land is subsequently sold or given away.
As it’s only a referral may be better to consider other reliefs
Nature of woodland could mean it qualify as
Business property – BPR – if used for commercial purposes
Agricultural property – if land is classified as agricultural land or ancillary to this.
Quick succession relief
- Intended to help taxpayer where the same assets would otherwise be charge to more than one IHT charge in quick succession
Applies were
- Death estate includes assets received by way of gift or inheritance
- In 5 years before their death
- Those assets were subject to an IHT charge when transferred to the deceased.
- IHT has to be payable on both times. So, if less than nil rate band won’t qualify.
