IHT - exemptions and relief Flashcards
What is an exemption in the context of IHT?
Certain gifts to individuals or other entities are exempt from IHT and have no effect on NRB.
What is relief in the context of IHT?
Gifts to particular assets benefit from relief – where conditions are met, the amount of IHT payable is reduced (sometimes by 100%).
What exemptions and relief are lifetime only?
- AE
- family maintenance
- normal expenditure out of income
- small gifts
- marriage
What are the death only exemptions and reliefs?
- Woodlands relief
- Quick succession relief
What are lifetime and death reliefs?
- spouse
- charity
- BPR
- APR
- policitcal party
- gifts for national purposes/heritage maintenance funds
- gifts to employee benefit trusts
- gifts to housing associations
What do Lifetime Only Exemptions and Relief apply to?
They apply to chargeable lifetime transfers (failed PETs and LCTs) only and cannot be applied to the death estate.
What is the Annual Exemption for gifts?
It allows individuals to make gifts of up to £3,000 tax free from IHT. You have one AE per year - if the AE for the first year is used first and in full, a transferor may look back to the previous tax year (only) and use any part of the AE not used in that year
Who can receive Family Maintenance payments?
Payments can be made to:
- spouse (or former spouse)
- a minor child for maintenance, education and training
- a dependent relative for their care.
What is the Small Gifts Allowance?
Up to £250 can be made free of tax with no limit to the number of different recipients.
What happens if gifts to one person exceed £250 in the same tax year?
If gifts to any one person in the same tax year exceed £250, the exemption does not apply at all for that done.
What are the limits for the Marriage Exception gifts?
A gift in consideration of a marriage is exempt up to:
- £5,000 if made by a parent
- £2,500 if made by one party to another
- £2,500 if made by their remoter ancestor
- £1,000 in any other case.
Does the Marriage Exception relief apply to both parties?
Yes, relief applies to both parties to the marriage.
What are the conditions for Normal Expenditure out of Income?
- From donor’s income (not capital)
- As part of normal/regular pattern of giving
- Do not affect donor’s standard of living
Is there an upper limit to the exemption for Normal Expenditure out of Income?
No upper limit to this exemption.
What increases the likelihood of HMRC accepting Normal Expenditure out of Income?
Transfers made under a legal obligation.
What is Taper Relief?
Not an exception but reduces the amount of IHT that would otherwise be payable.
What are the conditions for Taper Relief?
- Lifetime transfer made 3-7 years prior to transferor’s death
- IHT is payable in respect of the lifetime transfer (Failed PET or Re-assessed LCT)
How does Taper Relief affect the final tax bill?
Taper relief takes effect as a proportionate reduction of the final tax bill.
Taper rates
Date Reduction therefore x by
0-3 yrs before death No taper x1
3 - 4 yrs before death 20% x 0.8
4-5 yrs before death 40% x0.6
5-6 yrs before death 60% x 0.4
6-7 yrs before death 80% x 0.2
What is the spouse exemption?
Gifts between spouses during life and following death are completely exempt - doesn’t matter why the spouse inherits
Can unmarried couples claim spouse exemption?
No, unmarried couples cannot claim spouse exemption.
What is the charity exemption?
All transfers to registered charities during life and following death are exempt, provided the gift is used exclusively for the purposes of charity.
What are the conditions for charity exemption?
The charity must be subject to the jurisdiction of a UK court or that of another EU member state.
Can a gift to charity be conditional?
Yes, the gift can be conditional, provided the condition is satisfied within 12 months. BUT a gift must be immediate (not in remainder) and must usually be absolute
What are the conditions for gifts to political parties?
The party must have at least two MPs elected at the last general election or at least one MP elected and at least 150,000 votes.
What is business property relief?
Business property relief reduces the IHT payable on a qualifying business asset.
What are qualifying business assets for business property relief?
- Unquoted shares (100% relief)
- quoted shares (50% relief if taxpayer owns 50%+ of shares in a PLC)
- business or interest in a business (100% relief)
- assets owned by taxpayer but used for business (50% relief).
Are investment assets considered business property?
No, investment assets are NOT business property.
What is the qualifying period of ownership for business assets?
The transferor must have owned the business assets continuously for at least 2 years immediately prior to the relevant transfer.
The type of business does not need to be the same throughout the 2 yr period, but there must have been a business for all of that time.
What are the exceptions for the qualifying period of ownership for business assets to qualify for BPR?
- If assets are sold and replaced with new qualifying assets within a certain period of time, taxpayer’s period of ownership treated as continuous
- If person inherits business assets following someone’s death, they are deemed to acquire the assets on the date of death
- If a person inherits business assets following death of their spouse, they are deemed to have owned property from the time it was originally acquired
What is required for BPR to be available for lifetime transfers?
The qualifying property must be owned by the transferee and qualify for BPR when the transferor dies. There is no minimum ownership requirement of 2 years for the transferee.
What is Agricultural Property Relief (APR)?
APR reduces the value of a taxable transfer by the amount attributed to the agricultural property. Although a taxpayer can benefit from APR at 100%, it is considered a relief rather than an exemption.
What qualifies as Qualifying Agricultural Property?
Land and buildings 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 agricultural purposes.
What is the Qualifying Period of Ownership for APR?
The property must be occupied for two years immediately prior to transfer or owned by the transferor and occupied for agricultural purposes throughout the seven years prior to transfer.
What are the Rates of Relief for APR?
100% relief if the transferor was the owner-occupier or the property was let on a tenancy beginning on or after 1 September 1995.
50% relief applies less frequently, usually for tenancies created before 1 September 1995.
Which takes priority if both APR and BPR can apply?
APR is given priority over BPR.
What is Woodlands Relief?
Gifts of woodland may apply for relief if the deceased had purchased the woodland and owned it for at least 5 years before dying.
If the deceased inherited the woodland, no QPO applies. The value of woodland is the timber rather than the land, as it is a deferral of tax since the timber itself would be taxed. BPR or APR might apply too.
What is Quick Succession Relief?
Quick Succession Relief applies when a person dies and their death includes assets received by way of gift or inheritance in the 5 years before their death, and those assets were subject to an IHT charge when transferred to the deceased.
How is QSR calculated?
If death occurs within 1 year of the previous IHT charge, relief is 100%. This relief reduces each year, and only 20% of the amount of IHT paid is considered when death occurs 4-5 years after the original charge.
