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Wills & Administration of Estates > IHT: Exemptions and reliefs > Flashcards

IHT: Exemptions and reliefs Flashcards

1
Q

How do exemptions and reliefs work?

A
  • Certain gifts to individuals/other entities are exempt from IHT (made free from tax and have no effect on NRB)
  • Gifts of particular assets benefit from relief (amount of IHT payable if conditions are met)
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2
Q

What 5 exemptions are available for lifetime transfers only?

A
  • Annual exemption
  • Family maintenance exemption
  • Small gifts exemption
  • Marriage exemption
  • Normal expenditure out of income exemption

Apply to transfers made during lifetime (which may be taxed/reassessed after death)

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3
Q

What exemptions/reliefs are available on death only?

A
  • Woodlands relief
  • Quick succession relief

Only apply to death estate - cannot be applied to failed PET/LCT

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4
Q

What exemptions/reliefs are available to both lifetime transfers and the death estate?

A
  • Spouse exemption
  • Charity exemption
  • Business property relief
  • Agricultural property relief
  • Political party exemption
  • Exemptions for gifts for national purposes/to heritage maintenance funds
  • Exemptions for gifts to EBTs
  • Exemptions for gifts to housing associations
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5
Q

What is the annual exemption?

Lifetime only

A

Individuals can make gifts of up to £3,000 each year free from IHT

Can use any unused from previous year (only); can have max of £6,000 AE

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6
Q

When should annual exemption be used?

A
  • Chronologically to transfers when made (if more than one transfer on same day = apply pro rata)
  • Should be used after any other available exemption/relief to ensure AE available for later transfers
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7
Q

What payments are not treated as transfers for IHT purposes under family maintenance?

Lifetime only

A

Maintenance payments are not treated as transfers for IHT purposes if made to:

  • A spouse (former if part of divorce settlement)
  • Minor child of either party to a marriage for maintenance, education or training, or if over 18 and otherwise in full education or training
  • A dependent relative to make reasonable provision for their care

Maintenance exemption used where spouse allowance cannot be e.g. recipient domiciled outside the UK

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8
Q

What is the small gifts allowance?

Lifetime only

A

Small gifts of up to £250 per recipient can be made free from tax in any one year to as many different people as donor wants

Useful where client has number of different people they want to gift to

E.g. A gives £250 to B/A gives £100 to B and later £150 B in same year/A gives £250 to 20 different people in one tax year (total £5,000) = small gifts exemption applies

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9
Q

Can small gifts allowance be combined with annual exemption?

Can you give £3,250 away and claim AE and SMGA to cover all?

A

No! Can only claim both reliefs by transferring £3,000 to one person and £250 to the other

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10
Q

What is the marriage exemption?

Lifetime only

A

Applies to a gift given in consideration of marriage to a party of that marriage

Gift to be made re a specific marriage - contemporaneously, or before and conditional upon it, or after it satisfying a previous legal obligation

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11
Q

What does the marriage exemption make gifts exempt up to?

I.e. how much can be exempted with the marriage exemption?

A
  • Parent of one of the parties = £5,000
  • One party of marriage to the other = £2,500
  • Remoter ancestor (grandparent/great-grandparent) = £2,500
  • Any other case = £1,000
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12
Q

Can the marriage exemption be used with annual exemption for the same gift?

A

Yes!

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13
Q

Can a father give his own son £5,000 and the other party £1,000 and then claim an exemption of £6,000?

A

Yes! Relief applies to one or both parties to the marriage/CP

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14
Q

When is a transfer exempt under ‘normal expenditure out of income’?

3 requirements

A

A transfer of value is exempt if made:

  1. From donor’s income
  2. As part of a normal/regular pattern of giving; and
  3. Do not affect the donor’ standard of living

E.g. donor gives away 10% income generally each year

Q of fact whether requirements are satisfied

Relief more likely to apply if transfers made under legal obligation or if there is a clear history of a settled pattern of giving

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15
Q

What does taper relief do and when does it apply?

A

Reduces the amount of IHT that would otherwise be payable. Both following conditions must be met:

  1. A lifetime transfer was made 3-7 years before transferor died (PET has failed/LCT reassessed)
  2. IHT is payable in respect of the lifetime transfer

I.e. transferor must have died and value of transfer must be large enough to trigger IHT (greater than available NRB)

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16
Q

Does taper relief have an effect on the IHT payable in respect of the death estate?

A

No! Calculating tax due on lifetime transfers separately from tax due on death estate!

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17
Q

What amount of IHT due remains payable for each level of taper relief?

A
  • 0-3 years before death - 100% payable (no relief)
  • 3-4 years - 80% payable
  • 4-5 years - 60% payable
  • 5-6 years - 40% payable
  • 6-7 years - 20% payable
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18
Q

How does an exemption/relief benefit the taxpayer?

A

Uses up less of NRB = less of death estate taxed at 40%!

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19
Q

What is the spouse exemption?

Lifetime and death

A

Gifts between spouses are completely exempt

Provided both parties are domiciled in UK

NB 28 day survivorship clause

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20
Q

Does the spouse exemption apply to the value of assets transferred to a life interest trust if the surviving spouse receives a remainder interest?

A

No - only if the surviving spouse receives a life interest

Named as the life tenant

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21
Q

What is the charity exemption?

Lifetime and death

A

All transfers to registered charities are exempt irrespective of amount given provided gift used exclusively for purposes of charity

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22
Q

What does the gift have to be for the exemption to apply?

A

Immediate; must be absolute

Not in the remainder

23
Q

What does the charity have to be for the exemption to apply?

A

Subject to ‘jurisdiciton of a UK court or that of another EU MS’

Generally charities on UK national register will qualify

24
Q

How can a reduced rate of 36% death rate be available re chargeable assets in the estate?

A

If deceased leaves at least 10% of estate to charity

Beneficial for client to increase amount of propsed gift to secure rate

25
Q

When does the gift to political parties exemption apply?

A

As of last general election:

  • Party had at least 2 MPs elected
  • Party had at least 1 MP elected and at least 150,000 votes given to candidate representing party

One must apply

26
Q

What is the gifts for national purposes exemption?

A

‘National purposes’ includes museums, galleries

For public benefit

27
Q

What is a gift to heritage maintenance fund?

A

Gifts to trusts which maintain historic building or land of scenic, scientific and historic interest

28
Q

What is the gift to ETBs exemption?

A

Gifts to employee benefit trusts

Tax-efficient ways of remunerating employees

29
Q

What does Business Property Relief (BPR) do?

Lifetime and death

A

Reduces the IHT payable on qualifying business property at 50 or 100%

Provided they have owned qualifying assets for qualifying period of time

30
Q

What are the qualifying business assets and their rates of relief?

A
  • Unquoted shares - 100%
  • Quoted shares - 50%
  • Business or interest in a business - 100%
  • Assets owned by a taxpayer but used for business - 50%
31
Q

What are unquoted shares and what is the rate of relief?

A

All private company shares irrespective of size/value - 100%

32
Q

What are quoted shares and what is the rate of relief? What is the only time it will apply?

And when are they qualifying business assets?

A

Shares listed on a recognised stock exchange and taxpayer controls the company - 50%

Only qualifying if taxpayer controls the company!! I.e. 50%+

33
Q

What is a business or interest in a business and what is the rate of relief?

A

Taxpayer has sole trader or has a partnership interest - 100%

34
Q

What are assets owned by a taxpayer but used for business and what is the rate of relief?

A

Lands/buildings/machinery owned by taxpayer but used for business purposes by a company the transferor controlled or a partnership where transferor was partner - 50%

35
Q

When is the (interest in a) business or shares in a company not business property?

A

If the ‘business’ concerned consists wholly/mainly of:

  • Dealing in securities, stocks or shares, land or buildings
  • Making or holding investments

I.e. held for investment purposes

Problematic for property management companies + furnished holiday lets (and caravan sites!)

36
Q

What is the qualifying period of ownership for business property relief to apply?

A

Must have owned business assets continuously for at least 2 years immediately before relevant transfer

Type of business need not be the same throughout 2 year period

But must be A business

37
Q

What are the exceptions to the 2-year rule?

A
  • If qualifying assets are sold and replaced with new assets within a certain period of time
  • If person inherits assets following someone’s death
  • If person inherits assets following death of spouse
38
Q

What is the effect of ownership if assets are sold and replaced with new qualifying assets in a certain period of time?

A

Ownership treated as continuous

39
Q

What is the effect on length of ownership if person inherits assets upon someone’s death?

A
  • If not-spouse = acquire assets from date of death (even if transferred after)
  • If spouse = acquire assets from when originally acquired by deceased spouse (irrespective of how long married)
40
Q

What is agricultural property relief (APR)?

Lifetime and death

A

Reduces IHT payable on agricultural value of qualifying assets

Agricultural value may not equal market value

41
Q

What is qualifying agricultural property?

A
  • Agricultural land and buildings - used for purposes connected with agricultural activity
  • Farmhouses and cottages -
42
Q

When are farmhouses and cottages treated as qualifying agricultural property?

A

If they are of ‘character appropriate’ to associated agricultural land and have been occupied for purposes of agriculture i.e. not purely for domestic reasons

43
Q

What are the 2 qualifying period of ownership options for APR to apply?

A

Must have been:

  1. occupied for agricultural purposes by transferor throughout two years before transfer; or
  2. owned by the transferor and occupied by them or another (e.g. letting) for agricultural purposes throughout 7 years before transfer
44
Q

Are the exceptions for APR the same as BRP?

A

Yes! (replacement, someone’s/spouse’s death)

45
Q

When is 100% relief available for APR?

2 situations

A
  • If transferor was owner occupier (or would be entitled to vacant possession within 12 months from date of transfer); or
  • The property was let on a tenancy beginning on or after 1st Sep 1995

50% applies less frequently for tenancies pre-Sep 1995

46
Q

Where a taxpayer makes PET or LCT of qualifying business/agricultural assets and the transfer is assessed to IHT following the death of the transferor within 7 years, when is BPR/APR available for the lifetime transfer?

I.e. when does a lifetime transfer benefit from BPR or APR?

A

If the qualifying property transferred:

  • Is owned by the transferee; and
  • Qualifies for BPR when transferor dies (or on death of transferee if earlier)

No minimum ownership requirement of 2 years for transferee

47
Q

What if both BPR and APR apply?

E.g. commercial farming enterprises

A

APR given in priority; not possible to claim both

Agricultural buildings may qualify for both (APR applies), livestock not included in definition of agricultural property but value may qualify for BPR, farmhouses/cottages unlikely to apply for BPR but can qualify for APR

48
Q

What 2 reliefs only apply to the death estate?

A
  • Woodlands relief
  • Quick succession relief
49
Q

What dopes woodlands relief apply to and what is its value?

A

Gifts of woodland following death - the value of trees (timber) not land itself

50
Q

What is the qualifying period of ownership for woodland?

A
  • Deceased purchased woodland = must have owned at least 5 years pre-death
  • Deceased inherited woodland = no qualifying period of ownership
51
Q

What does woodlands relief being a ‘deferral’ of IHT mean?

A

Woodlands relief is a deferral of IHT that would otherwise be payable on value of woodland; tax is deferred until timber (not land) is sold/given away

Deferral; not reduction of liability

To use deferral - administrators should make election to exclude value from death estate

52
Q

Can alternative reliefs apply instead?

A
  • BPR if woodland used for commercial purposes
  • APR if land is classified as agricultural land

BPR and APR more generous reliefs; should claim over woodland relief

53
Q

When does quick succession relief apply?

3 conditions

A

Where a person dies and:

  • Death estate includes assets received by way of gift/inheritance,
  • In the5 years before death; and
  • Those assets were subject to an IHT charge when transferred to deceased

Intended to help taxpayer where same assets would otherwise be subject to more than one IHT charge in quick succession

54
Q

How does quick succession relief work regarding when the death occurs?

A
  • If within 1 year = relief is calculated with reference to 100% of amount of IHT paid previousy
  • If not within 1 year = Reduces each year - only 20% of amount of IHT paid previously considered where death occurs 4-5 years after original charge

Wills & Administration of Estates (13 decks)

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