IHT: exemptions & reliefs

Question 1

What exemptions & reliefs are available for lifetime transfers only?

Answer 1

-Annual exemption

-Family maintenance exemption

-Small gifts exemption

-Marriage exemption

-Normal expenditure out of income exemption

-Taper relief

Question 2

What exemptions & reliefs are available on death only?

Answer 2

-Woodlands relief

-Quick succession relief

Question 3

What exemptions & reliefs are available for both lifetime transfers and death estate?

Answer 3

-Spouse exemption

-Charity exemption

-BPR

-APR

Question 4

What is the annual exemption and what does it allow?

Answer 4

The AE allows individuals to make gifts of up to £3,000 each tax year free from IHT.

The AE is applied chronologically to transfers when they are made.

It should be used after any other available exemption or relief is applied to ensure the AE is available for later transfers.

A maximum of 2 x AE (£6,000) may be available to use against a transfer as a transferor may use the previous tax year’s AE.

Question 5

What is the family maintenance exemption?

Answer 5

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

-a spouse (or former spouse if part of a divorce settlement)

-the minor child of either party to a marriage for maintenance, education or training, or if over 18 and otherwise in full time education or training

-a dependant relative to make reasonable provision for their care

Question 6

What is the small gifts allowance?

Answer 6

Small gifts of up to £250 per recipient can also be made free from tax-a transferor can make as many as they like.

The small gifts allowance is not available if combined with any other exemption, including the AE.

If gifts to any person in the same tax year exceed £250 the exemption does not apply at all for that donee.

Question 7

What is the marriage exemption?

Answer 7

A gift given in consideration of a marriage to a party of that marriage is exempt up to:

-£5,000 if made by a parent of one of the parties

-£2,500 if made by one party of the marriage to the other

-£2,500 if made by their remoter ancestor e.g. grandparent or great-grandparent

-£1,000 in any other case

Question 8

Can the marriage exemption and annual exemption both be claimed in respect of the same gift?

Answer 8

Yes, this is possible.

Question 9

What is the normal expenditure out of income exemption?

Answer 9

A transfer of value is exempt if made:

-from the donor’s income (not capital)

-as part of a normal/regular pattern of giving, and

-do not affect the donor’s standard of living

There is no upper limit to this exemption e.g. a donor could give income away generally each year such as 10% of total income.

Question 10

What is the spouse exemption?

Answer 10

Gifts between spouses during life and following death are completely exempt, provided both parties are domiciled in the UK.

On a person’s death, spouse exemption will apply to the value of assets transferred to a life interest trust if the surviving spouse receives a life interest e.g. named as the life tenant.

Question 11

What is the charity exemption?

Answer 11

All transfers to registered charities during life and following death are exempt irrespective of the amount given provided the gift is used exclusively for the purposes of the charity.

The gift must be immediate and not in remainder for the exemption to apply.

Question 12

What is the reduced rate of IHT if the deceased leaves at least 10% of their estate to charity?

Answer 12

A reduced rate of IHT (36% instead of 40%) may be available if the deceased leaves at least 10% of their estate to charity.

Question 13

What is the effect of Business Property Relief (BPR)?

Answer 13

The effect of BPR is to reduce the value of a taxable transfer by the amount attributed to the business property. A person must have owned qualifying business assets for the qualifying period of time.

Question 14

What relief is available under BPR on unquoted shares?

Answer 14

100% relief, irrespective of size or value of shareholding.

Question 15

What relief is available under BPR on quoted shares?

Answer 15

50% relief, provided the the taxpayer controls the company (50+).

Question 16

What relief is available under BPR on a business/interest in a business?

Answer 16

100% relief, provided the taxpayer is a sole trader or has a partnership interest.

Question 17

What relief is available under BPR on assets owned by a taxpayer used for business purposes?

Answer 17

50% relief, provided the assets are used for business purposes.

Question 18

What is the qualifying period of ownership for BPR?

Answer 18

To qualify the transferor must have owned the business assets continuously for at least 2 years immediately prior to the relevant transfer.

Question 19

What are the exceptions to the two-year rule for BPR?

Answer 19

-If qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the period of ownership is treated as continuous

-If a 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 the death of their spouse, they are deemed to have owned the property from the time it was originally acquired by their deceased spouse irrespective of how long they had been married

Question 20

What is the effect of Agricultural Property Relief (APR)?

Answer 20

APR applies to the agricultural value of the land and not the market value.

The effect of APR is to reduce the value of a taxable transfer by the amount attributed to the agricultural property.

Question 21

What constitutes qualifying agricultural property?

Answer 21

-Agricultural land and buildings: used for purposes 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 the purposes of agriculture

Question 22

What is the qualifying period of ownership for APR?

Answer 22

-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 throughout seven years immediately before the transfer

Question 23

What are the exceptions to the qualifying period of ownership for APR?

Answer 23

-If qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the period of ownership is treated as continuous

-If a 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 the death of their spouse, they are deemed to have owned the property from the time it was originally acquired by their deceased spouse irrespective of how long they had been married

Question 24

What rate of relief is available under APR?

Answer 24

100% relief is available if the transferor was the owner/occupier, or the property was let on a tenancy beginning or after 1 September 1995.

50% relief applies in respect of tenancies created before September 1995 but is less frequent.

Question 25

What is woodlands relief and when is it available?

Answer 25

Woodlands relief is a deferral of the IHT-to use the deferral, the PRs should make an election to exclude the value of the woodland from the death estate.

The deceased must have owned the woodland for at least 5 years before dying for the relief to apply. If the deceased inherited the woodland, there is no qualifying period of ownership.

Question 26

What is quick succession relief?

Answer 26

QSR is intended to help the tax-payer where the same assets would otherwise be subject to more than one IHT charge in quick succession

Question 27

When does quick succession relief apply?

Answer 27

QSR applies where a person dies and:

-their death estate 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