IHT: Exemptions and reliefs

Question 1

Exemptions and reliefs available during lifetime and death estate

Answer 1

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

Question 2

Exemptions and reliefs available for lifetime transfers only

Answer 2

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

Question 3

Exemptions and reliefs available on death only

Answer 3

• Woodlands relief
• Quick succession relief

Question 4

Annual exemption

Answer 4

£3000 - should be used after other exemptions or reliefs have been applied

If not used previous year, can claim it (so £6000). Current year must be used first before carrying forward AE

Tax year 6 April - 5 April

Question 5

Family Maintenance

Answer 5

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

• A spouse (would only need to be used in instances where spouse is domiciled outside the UK otherwise spousal exemption would apply)
• The minor child of either party to a marriage for maintenance, education or training or over 18 and in full time education and training
• A dependant relative to make reasonable provision for their care (but not payments which go beyond maintenance

Question 6

Small gifts allowance

Answer 6

Small gifts of up to £250 per recipient can be made free of tax

Can make multiple gifts of up to £250 to as many different people as they like

Not available to combine - e.g. annual exemption

Will not apply if the total value of gifts in a year exceeds £250.

Question 7

Marriage exemption

Answer 7

Gift given in consideration of marriage:

parent: £5000
one party to another: £2500
grandparent or greater: £2500
Any other case: £1000

The gift must be in relation to a specific marriage.

Question 8

Normal expenditure out of income

Answer 8

Exempt if made:
- from the donor’s income (not capital)
- as part of a normal/regular pattern of giving, and
- does not affect the donor’s standard of living

HMRC are more likely to accept the relief applies if transfers are regular.

Question 9

Taper relief

Answer 9

If the transfer was made 3-7 years prior:

Will apply where the transferred amount was greater than the available nil rate band.

This takes effect as a proportionate reduction of the final tax bill.

Question 10

Spousal exemption

Answer 10

Any gift between spouses is during life and death is exempt.

Both need to be domiciled in the UK.

Does not matter why the spouse inherits.

Can be conditional as long as the condition is satisfied within 12 months of death.

Will apply to lift interest in a trust but not if the spouse is the remainderman.

Question 11

Charity exemption

Answer 11

All transfers to registered charities during life and following death are exempt irrespective of amount give.

Amount must be used exclusively for charitable purposes.

Gift must be immediate and not in remainder to apply.

Should check charitable status.

Question 12

Charity exemption to reduce IHT rate

Answer 12

If someone leaves at least 10% of their estate to charity then a reduced rate of 36% would apply instead of 40%.

Question 13

Other exemptions (life and death)

Answer 13

Political parties: at least two MPs elected, one MP had at least 150,000 votes

Gifts of land to housing associations: exempt

National purposes: exempt (e.g. museums and galleries)

Gifts to heritage maintenance funds: eg maintaining a building

GIfts to employee benefit trusts: exempt

Question 14

Business Property relief: qualifying assets

Answer 14

Assets which qualify:

• Unquoted shares: all private company shares (100%)
• Quoted shares: shares listed on a recognised stock exchange but only if holds a controlling share (50%+)
  (50%)
• Business or interest in a business: sole trader or partner
  (100%)
• Assets owned by tax payer but used for business
  (50%)

Do not qualify:
- dealing in securities, stocks or shares, land or buildings
- making or holding investments

Can cause problems for:
- property management companies
- furnished holiday lets and caravan sites
- assets within a business which are not used for trade

Question 15

BPR: qualifying period of ownership

Answer 15

Must have owned the assets continuously for at least 2 years immediately prior to the relevant transfer.

Exceptions:
- sold and replaced with new assets
- inherits business following someone’s death: deemed to acquire assets on date of death
- If inherited from spouse, deemed to inherit from the time it was originally acquired by their spouse irrespective of how long they had been married

Question 16

BPR and lifetime transfers

Answer 16

BPR will still be available for a failed PET so long as the transferee still holds the shares.

Question 17

Agricultural property

Answer 17

Agricultural land and buildings:
used for purposes connected with agricultural activity

Farmhouses and cottages: may qualify of associated to the land and occupied for purposes of agriculture (farmer’s house)

Question 18

Agricultural Relief

Answer 18

Reduces IHT payable on agricultural value of the assets.

This is different from the market value.

Reduces by 100% of agricultural value.

Tenancies before 1995 may be 50%.

Question 19

Qualifying periods of ownership

Answer 19

• Occupied for agricultural purposes by the transferor throughout the two years immediately before the transfer; or
• Owned by the transferor and occupied by them or another for agricultural purposes through 7 years immediately before the transfer.

Question 20

APR and BPR interaction

Answer 20

Commercial farms may have an overlap.

APR takes priority.

Cannot claim both on the same asset.

Note: livestock does not qualify for APR but may qualify for BPR.

Question 21

Woodlands Relief

Answer 21

Must have purchased the woodland 5 years before dying for the relief to apply.

No qualifying period if inherited from someone else’s death.

Deferral of IHT, can make an election.

Value is the value of trees not land.

Tax is deferred until timber is sold or given away.

Question 22

Woodlands relief alternatives

Answer 22

only applies to value of timber not the land.

May be better to qualify as BPR or APR as these are more generous.

Question 23

Quick succession relief

Answer 23

QSR applies where a person dies and:
- their estate includes assets received by way of gift or inheritance
- in the 5 years before their death
- those assets were subject to IHT when transferred to the deceased.

QSR reduces IHT payable on the brother’s estate to the extent it is attributable to assets which had been previously charged.

QRS will not apply where the assets were not charged originally.

Within first year - 100%
reduces each year after