IHT: Death Estate Flashcards
What are the steps for calculating IHT on death?
Calculate the cumulative total – This is the total chargeable value of all the chargeable transfers made in the previous 7 years.
Identify the assets included in the taxable estate – Remember that this will not necessarily be the same as the assets included in the succession estate.
Value the taxable estate – Assets are generally given their market value although there are exceptions for related property and joint property.
Deduct any debts – This includes lifetime debts and funeral expenses.
Deduct available exemptions and reliefs – Consider the availability of spouse exemption, charity exemption, BPR and APR.
Apply 0% rate up to the value of the residence NRB and any transferred amount.
Apply 0% rate up to the value of the basic NRB and any transferred amount (after having taken away the cumulative total), then apply 40% rate to the remainder.
What is the cumulative total?
Calculated by adding up the value of all chargeable transfers made in the 7 years prior to death.
This tells us how much of the NRB is left.
What assets are included in the death estate?
All jointly owned property
Property subject to reservation
Donationes mortis causa
Statutory nominations
Some interests in possession
How is jointly owned property treated in the death estate?
Tenant in common: share passes into the deceased’s estate for tax and distribution purposes
Joint tenants: For IHT purposes there is a deemed severance of the joint tenancy immediately before death. This means the deceased’s share of the property will be included in their taxable estate.
What is property subject to reservation?
If a person gives an asset away during their lifetime but reserves a benefit in that asset, the value of the asset at date of death will be included in the donor’s IHT estate when they die at the date of death value.
Individuals can avoid the gift with reservation of benefit (GROB) rules by ensuring that they either do not derive a benefit from the assets they have given away, or, by paying a market value rent for the time they do derive benefit e.g. paying rent each time the donor uses the holiday cottage.
What are donationes mortis causa?
This is a lifetime gift that is made conditional on death.
The conditional nature of the gift means that for IHT purposes the subject matter of the DMC is still part of the deceased’s estate and IHT will be payable on its value as at the date of death.
What are statutory nominations?
A person can make a written nomination of monies in any of the following accounts:
Friendly Society
Industrial Society
Provident Society
The amount in each account must not exceed £5k
The money DOES form part of the IHT estate.
How are interests in possession trusts created before March 2006 treated at death?
The capital value of all interest in possession trusts treated as being owned by the person with the interest in possession for IHT purposes.
How are interests in possession trusts created on or after 22 March 2006 treated at death?
A life interest trust created on or after 22 March 2006 will only be treated as IHT being payable if it is an immediate post-death interest.
What are the assets excluded from the taxable estate?
Excluded property
insurance policies written in trust for a third party
discretionary pension scheme arrangements
What is an example of excluded property?
A remainder interest in a life interest trust.
If the remainderman of a life interest trust dies before the life tenant, the trust fund that would have passed to them on the life tenant’s death is not included in the remainderman’s taxable estate.
In contrast, where a life tenant dies, the value of the trust may be included in their taxable estate.
What is an insurance policy written in trust?
If the deceased had an insurance policy on their own life where the sum payable on death was written in trust for another the proceeds of the policy are not included in the deceased’s estate for IHT purposes.
If the policy proceeds were payable to the deceased’s estate then the amount would be included in the taxable estate.
What are discretionary pension schemes?
If the deceased was a member of an employer’s pension scheme any discretionary lump sum payment made by the pension fund trustees is not included in the taxable estate.
Many pension schemes allow contributors to indicate during their lifetime who should receive the money if the trustees exercise their discretion to make a payment after their death.
Pension lump sums payable by right to the estate of the deceased are included in the taxable estate.
What is the general rule in relation to valuing the taxable estate?
Assets are valued at market value at the date of death.
What are the exceptions to the general rule that assets are valued at the market value at the date of death?
Quoted shares: valued by taking the lower of the two prices on the Stock Exchange Daily List and adding one-quarter (25%) of the difference between the higher and lower value.
Related property: if assets owed by spouses are worth more when valued together, each party’s share is valued at their proportionate share of the combined total.
Joint property: where land is co-owned (whether JT’s or TC) the value of the deceased’s share is reduced by 10-15% to reflect the difficulty of selling a share of the property rather than the whole. The deduction is not applied where the co-owners are married.
