IHT deck revised Flashcards
What is inheritance tax and what is the main legalisation ?
A tax on the value of a person’s estate at the time of death and is governed by the inheritance act 1984.
How many estates pay inheritance tax ?
Only around 3.7% of deaths result in inheritance tax. This is because of the legalisation, and reliefs surrounding it.
What is liable for IHT
All of the deceased estate as well as any PET made within the past 7 years up to the threshold (tapered tax relief from 3 years).
When is IHT assessment due
The tax is due 6m after date of death and can accrue interest.
When dose IHT have to be paid ?
Payable on certain transfers of value which are
- Value of someone’s estate on death
IHT on the land and buildings, shares and security’s may be paid in 9 instalments over 10 years.
Generally, inheritance tax is due six months after the end of the month in which death occurs.
However, if the asset is sold it becomes immediately payable
- Certain transfers during someone’s lifetime ( PET)
What percentage of the estate is taxed
What percent can be taxable if donated to charity’s and how much has to be donated to charity.
40% - after the £325,000 threshold
If 10% of net estate left to charity lower 36% rate may apply
What are the 3 Nil rate bands
1) Threshold of £325,000
2) Resident nill rate band
3) Transferable nil rate band
What is the Resident nill rate band
- £175,000 is added to tax free threshold for transfer of property. (Total of £500,000 PP)
175,000 applicable in in 2021 (sliding scale from 2017 = £100,000 +£25,000 per year until 2021).
- Only applicable to direct lineal decedents
- The residence’s must not exceed a value of 2 mil. If exceeding 2Mil then a backwards taper will occur in which for every £2 over 2Mil £1 will be deducted from the total value until 0 is reached. (this means that any property over 2m will not have any relief.
What is the Transferable nil rate band
Nil rate band allocation and resident band allocation can be passed from one civil partner to another. (325,000+ 325,000 = 650,000) (175,000 +175,000 = 300,000)
(Potential tax free transfer of 1 Mil to direct lineal descendant)
What is a chargeable transfer
The chargeable transfer is a taxable amount – this means any value over threshold is taxed and is referred to as the chargeable transfer.
what is a value transferred
The term value transferred is “equal to the value of his Estate immediately before his death” (s.4(1) IHTA 1984).
What is a lifetime transfer ?
What are the 5 classifications of a lifetime transfer?
A lifetime transfer is a gift from one person to another. This gift may be treated for IHT purposes.
- Exempt
- Gift with a reservation of benefit
- Potentially exempt transfer (PET)
- Chargeable lifetime transfer - not taxable
- Chargeable lifetime transfer - taxable
Name some exemptions
Estates under £325,000
Gifts over 7 years
Gifts to charities / political party / national trust
Transfer to spouse
Gifts made during tax year not exceeding £3000
What is a gift with a reservation ?
How can a gift with reservations be avoided for HIT.
Where a donor reserves a benefit from the gift, or subsequently enjoys the benefit of a gift for the purposes of Inheritance Tax, the gift is treated as having been made only when the reservation ceases or the donor dies.
Dad gifts house to son but lives rent free.
Transferor would have to pay open market rent on the property.
What is a potentially exempt transfer
A transfer than maybe exempt form IHT
Types of PET
A lifetime transfer made to:-
- Another individual / gift
- A bare trust
- A disabled trust
What is a PET to a individual ?
Can be potentially exempt if made 7 years prior to death. IF donor dies prior to 7 years then tax will be payable (chargeable transfer) on a tapered scale (only applies if more than chargeable threshold)
Gifts need to be included in total value of estate if inside of 7-year window. There values would be tapered according to below scale.
This may force the value transferred to exceed the threshold creating a changeable amount.
What are the 3 transfers into trusts which are considered as CLT (Chargeable Lifetime transfers)?
Interest in possession trust -
Discretionary Trust - IHT payable immediately at 20% instead of 40%. But 10y charge applicable.
Accumulation and Maintenance Trusts - intended to make provisions for people under 25
What are the rules on giving gifts
People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without this being added to the value of your estate
( bring to top ) What services dose the VOA provide in relation to inheritance tax
To provide valuations of land, buildings, lordships of the manor, growing crops, live and dead farming stock, plant, machinery and fixtures which are required for assessment of IHT.
What are the rules surrounding UK domiciled and non domiciled residence.
- If the person is a UK resident, then all assets regardless of location are liable to IHT
- If not UK resident only UK based assets are liable for IHT
What reliefs are there for IHT
Business Relief Agricultural Relief Woodland Relife Double taxation relief (taxed in 2 countries) National Heritage Relief Taper Relief Quick Succession Relief Loss on sale relief
What is woodlands relief? (IHT)
*100% relief on transfers on death of growing timber (applies to the timber and not the land)
What is Quick Succession Relief
Where deceased received assets on which IHT was paid within previous 5 years. Value of these assets is deducted from the deceased’s estate.
Taper Relief
If donor dies before 7 years expires after a non-exempt transfer. Calculated on a sliding scale.
What are the rules around business assets and business relief? (5)
- Held for a minimum of 2 years ( a lesser period is acceptable if these have been inherited on death of a spouse)
- Relief is given for 100% unincorporated businesses and shares in inquoted companies
- Relief is 50% for business assets and controlling shareholdings in quoted companies
- Only given to qualifying companies
- Assets must have been required for business purposes at time of death
Loss on sale relief
Where the personal representatives sell the assets for less than probate value , they can reclaim the part of the IHT that has been paid. This happens with sales of shares within 12 months and sale of land within 4 years
What RICs guidance is available for capital taxation
VPGA15 of the Red Book UK National Supplement contains guidance for all self assessed statutory taxation.
What is the definition of market value for IHT
What section is the definition of MV included in
What are the hypothetical principals ?
Price of property if sold on the open market at the date of death excluding an impact of the whole estate being put on the market
Section 160 of Inheritance Tax Act 1984
The sale is a hypothetical sale
The vendor is a hypothetical, prudent and willing party to the transaction
The purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser)
For the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price
All preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date
The property is offered for sale on the open market by whichever method of sale will achieve the best price
There is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers
Name key case law
Duke of Buccleuch v IRC
(Prudent lotting)
Ellesmere v IRC
(best value)
White and Moss v IRC
(undivided share)
Clay v IRC
(Special purchaser)
What is prudent lotting and what is the relevant case law ?
Prudent lotting is the practise of grouping property’s together for valuation purposes.
Selling the estate in lots that would maximise the proceeds of sale
Sometimes appellant and VO will arrive at different valuations due to how assets have been valued because of grouping.
It is then up for the parties to agree on the best way to group the items for sale.
Duke of Buccleuch v Inland Revenue Commissioners [1966]
“The House of Lords held that a large Estate was to be subdivided into its natural units for valuation purposes (prudent lotting).”
Gray (surviving executor of Lady Fox deceased) v Inland Revenue Commissioners [1994]
Different assets comprised in an estate can be treated as a single unit of property if disposal as one unit was the course that a prudent hypothetical vendor would have adopted in order to obtain the most favourable price without undue expenditure of time and effort.
What is a special purchaser and what is the relevant case law.?
A special purchaser is one who has a particular interest in acquiring a property.
IRC v Clay (1914)
Effectively established that where there is a known purchaser in the market who is willing to buy at a considerably higher price than anyone else, then the value of the asset for tax purposes is represented by the higher price the special purchaser is willing to pay.
o The special purchaser can reasonably be shown to have been both able and willing to purchase at the date of valuation.
o Existence of a special purchaser can reasonably be supposed to have been known to the ‘market’ at large.
Valuation at £750 but SP payed £1000. Court of appeal determined the valuation at £1000. ( this is not one bid above as typically expected.
What is a joint tenancy
Tenants own joint equal rights in the whole property. Upon death the deceased’s interest passes onto the survivors in what is known as survivorship
What is a tenancy in common
An undivided share where 2 or more people with distinct different shares. When disposing of a share the other trustees must be consulted. Tenancy in common now known as a trust of sale and a trust of land
Is a arms length sale considered to be a transfer of value ?
No as OMV
What is a undivided share ?
A share in a property where there is no defined portion
What case law examines the arithmetic share of a joint tenancy and what is the arithmetic share
Wight and Moss v CIR (1983) 264 EG 937
50/50 ownership in property.
Approch decided by tribunal was that OMV -15%.
- where the other co-owner(s) is (are) not in occupation and the purpose behind the trust no longer exists - 10%
- where the other co-owner(s) is (are) not in occupation but they have a clear right to occupy as their main residence and the purpose behind the trust still exists - 15%
- where the other co-owner(s) is (are) in occupation as their main residence - 15%
What is the Crossman principle?
Hypothetical sale of the property must consider any restrictions that have been placed on the sale as if they would still apply when the premises is sold on.
What is the difference between MV for red book valuations and MV for CGT & IHT
Capital tax MV does not account for the flooding of the market and also accounts for special purchasers
