IHT CH14 Flashcards
When does an IHT charge arise?
Arises if a transfer of value of chargeable property is made by a chargeable person
Chargeable person
- worldwide transfers of assets by UK domiciled individuals
- transfers of uk assets by non uk domiciled individuals
Transfers of value
- anything that causes a diminution in value in the donors estate
- this includes gift and sales at undervalue
- the measure is the loss for the donor, not the increase in the donees wealth
Chargeable property
Property is chargeable unless it is excluded property (which is out of the scope of IHT)
Excluded property:
- reversionary interests in interests in possession trusts
- property situated outside the uk, where the person beneficially entitled to the property is not domiciled in the UK
What are PETS and CLTS and impact on life and death comps?
PETS: potentially exempt transfers
Life - none - use up AE (3k per year)but not NRB
Death - becomes chargeable if donor dies within 7 years after the transfer
Death tax charged at 40%
CLT - chargeable lifetime transfers
Life - chargeable during life (life tax rate 20% of gross transfer)
Assume donor pays life tax unless told otherwise
Death - additionally death tax at 40% payable if donor dies within 7 years of CLT
Exemptions for life transfers and death estate?
- Spouse/civil partner (if non domiciled, maximum exemption is £325k)
2.gifts to uk charities - Gifts to qualifying political parties (2 MPs or 1 with >=150k votes at last general election)
Exemption available only for lifetime transfers
- AE (£3k per year, cf if unused)
- Small gifts exemption (if <£250 paid to individual during tax year)
- Marriage exemption for gifts on the occasion of marriage (5k for parents, 2.5k for grandparents, 1k for anyone else)
- Normal expenditure out of income (where there is a pattern of gifts made out of income, so that the donor has enough income left to maintain their usual lifestyle)
What is the nrb?
Nrb is 325000 unless different (given in exam) before 09/10.
The nrb that can be used on a specific chargeable transfer is reduced by any gross chargeable transfers in the 7 years prior to the transfer
What is a gross chargeable transfer
- The gross gift (after exemptions but before the NRB)
Can you transfer NRB to spouses and how much ?
Transfer of NRB to a surviving spouse - only on 2nd death - comp 2&3
1.any unused NRB on the death of the first spouse can be used by the second spouse
- Claim within 2 years from end of month of death of the second spouse
- Take the % unused and apply this % to the current NRB (so if spouse one died with 60% of their NRB unused in 2007, spouse 2 would benefit from 60% x 325k if they died in 23/24)
- The NRB can only be transferred to calc death tax not lifetime tax
Pro forma for lifetime tax on CLT
Transfer value X
Less: CY/PY AE (x)
(If pet stop here ) A
(Sub working)
NRB @date of transfer X
Less GCT in 7 years before transfer (X)
GCT = CLT + chargeable PETS
Excess over NRB B
Tax @20% if trustees pay tax
Tax @25% if donor pays tax
Gross chargeable transfer (GCT)
If trustees pay tax A
If donor pay tax A+B
What is tax payable on death
Death tax is payable on:
1. All lifetime transfers made within 7 years before death (comp 2) And
2. On the death estate (comp 3)
Death tax is at 40% rate
Donees of lifetime gifts are responsible for paying any death tax on those gifts
Death tax on estate comes out of the estate (paid by executor)
Pro forma of death tax for CLT & PETS - comp 2
Gross chargeable transfer (from comp1) X
Less fall in value relief (X)
X
Sub working
NRB @ date of death X
Transferred NRB from dead spouse X
Less: GCT in 7 years before transfer (X)
(X)
Excess over NRB X
Tax at 40% X
Less taper relief (X)
Less lifetime tax paid (comp 1) (X)
Tax payable by donee X
Taper relief rates (in 2’s above 20%)
3-4 = 20%
4-5 = 40%
5-6 = 60%
6-7 = 80%
Death tax on death estate - comp 3 pro forma
Death estate (assets owned at death) X
Less allowance expenses&debts:
- debts (not endowment mortgages or gambling) (X)
- unpaid taxes (X)
- funeral expenses (X)
Less exemptions:
- amounts left to spouse (X)
- amounts left to charity (X)
- amounts left to political party (X)
= chargeable estate X
Sub working
NRB at date of death X
Transferred NRB from dead spouse X
Less: GCTS in 7 years before death (X)
=excess over NRB X
TAX at 40% X
Less: quick succession relief (X)
Less double tax relief (X)
=tax payable (X) by executors out of estate fund
What is additional residence mill rate band (ARNB)?
An ARNB of 175k is available for use against the death estate if :
- the deceased died after 5th April 2017 and
- left their main residence to a direct descendant in their will
Rules on ARNRB?
- The full 175k extra NRB can only be used against death estate
- If the main residence less any outstanding mortgage is worth <175k, then the RNRB is reduced to the value of the residence less the mortgage
- Any unused residence NRB can be transferred to a surviving spouse, regardless of when the first spouse died
- As the RNRB only applied to inheritance to a direct descendant, you may save IHT by varying the will to ensure that a direct descendant inherits the main residence
Tapering of RNRB
- If the net value of the death estate is >2m, then £1 of RNRB is removed for every £2 in excess of £2m(value of the estate after liabilities, but before exemptions and the NRB)
- Hence if the net value of the estate is >2.35m then all of the residence NRB is lost
Payment of IHT tax dates
Life time tax
Transfer between 6 Apr - 30 Sep - due next 30 Apr
Transfer between 1Oct - 5 Apr - due 6 months after month of transfer
death tax on lifetime gifts or deaths estate
Due 6 months after the month of death
Instalment plans for IHT criteria and qualifying assets
Tax can be paid in 10 equal annual instalments on certain assets
1. In death estate and
2. On lifetime transfers where donee pays the tax
For pets to qualify for this relief , the donee must still own the asset at the date of the donor or donees death
Qualifying assets
Land - interest charged over 10 yrs
Shares - if donor controlled - no int
Business or interest in a business - no int
Unquoted shares provided: - no int
1.tax cannot be paid without undue hardship or
2. Value >=20k and >=10% of the company
Payment of instalments:
1st instalment due on normal due date for non instalment property
Next payments on subsequent 9 anniversaries
What is diminution in value?
Giving away shares pro forma
Before % = x amount
After % (before less deduction) = y amount
Transfer value per IHT = x - y
What are quoter shares valued at for IHT ?
Lower of:
1.The quarter up rule or range of value X+1/4(Y-X)
2. The average of the highest and lowest marked bargains (actual bargains)
What is fall in value relief
If an asset that was given away during donors lifetime is either:
- Sold for <original value or
- Mv at death is <og value
The recipient of that gift can elect that any death tax on that gift is calculated by reference to the lower value
Note: the fall in value is ignored when calculating tax on other gifts and tax on the death estate
Qualifying assets for BPR for IHT and relief available for each type
Unincorporated trading business eg sole trade or share in partnership - 100%
Shares in unquoted (incl AIM) trading company - 100%
Shares in quoted trading company if transferor has control - 50%
Land, buildings and P&M owned personally and used in a partnership, or a company controlled by individual - 50%
Notes:
Related property is taken into account when deciding control
Includes property located anywhere in the world
Applies to lifetime gifts and the death estate
What should the ownership period be for BPR relief
Generally 2 years with the following exceptions:
- Where the property transferred replaced other business property which together were owned for at least 2 years within the 5 years prior to the transfer
- Where property passed on the death from a spouse/civil partner, ownership by the deceased spouse is counted as ownership by spouse/ civil partner making the transfer
- The 2 year ownership requirement is deemed to have been satisfied if there are successive transfers of the same property and:
3.1 one of which was on death AND
3.2 the first transfer of property qualified for BPR
Is BPR available on lifetime transfers and criteria?
Available if:
1. The donee still uses the asset as a business asset at the earlier of donee or donor death or
2. The donee disposes of the asset and re invests the proceeds in qualifying replacement property within 3 years of disposal
Note: a lifetime transfer qualifying for BPR will also qualify for cgt gift holdover relief
Excepted assets for BPR?
BPR is not available if assets have not been used wholly in the business in the last 2 years or are not required for the running of the business,
Prevent owners from filling company up with non business assets and claiming 100% BOR when pass shares to donee
What is APR and how does it work?
Agricultural property relief works in a. Similar way to BPR, but applies to agricultural property situated in the UK,
Channel Islands or Isle of Man and in the European economic area.
APR gives 100% relief on the agricultural value of qualifying property
Similar to BPR you need a qualifying asset and sufficient ownership period
What qualifying assets fall under APR
- Land used to grow crops or rear animals
- Farm buildings
- Shares in farming companies (that the individual controls)
Ownership period for APR
- 2 years for owner occupier (who farms the land themselves or controls a company that farms the land)
- 7 years for a landlord (where a tenant farms the land)
- The same exceptions apply as for BPR with the exception of needing 7 of the last 10 years for replacement of property farmed by a tenant
Interaction between APR & BPR
- APR takes priority over BPR (eg on shares in farming companies)
- BPR is available on the balance of the business not relieved by APR provided the bal qualifies for BPR
