IHT nil rate bands

Question 1

What is IHT and who does it apply to?

Answer 1

IHT is a tax primarily paid on the estate of a deceased person.

It applies to the UK assets of UK resident taxpayers and the worldwide assets of UK-domiciled taxpayers.

Question 2

What is the current lifetime IHT rate?

Answer 2

20%

Question 3

What is the current IHT death rate?

Answer 3

40%

Question 4

What are the IHT trigger events?

Answer 4

Potentially exempt transfers (PET)

Lifetime chargeable transfers (LCT)

Death

Question 5

What are potentially exempt transfers (PET)?

Answer 5

A PET is a lifetime transfer of value to another individual.

Question 6

What are lifetime chargeable transfers (LCT)?

Answer 6

All lifetime transfers of value made by a person into a trust on or after 22 March 2006 will give rise to an LCT.

Question 7

What is a transfer of value?

Answer 7

It is a disposition which results in an immediate decrease in the value of the individuals estate.

Question 8

What is a chargeable transfer?

Answer 8

A transfer of value' made by an individual which is not an exempt transfer’.

Question 9

What does the `value’ of a transfer depend on?

Answer 9

It depends on the trigger event.

For lifetime transfers, it is assessed by reference to the loss in value to the donor.

For the death estate, the value is calculated by reference to the market value of items in the estate on the date of death.

Question 10

What is the current NRB?

Answer 10

£325,000

Question 11

What does TNRB mean?

Answer 11

An individuals surviving spouse can inherit the unused portion of their basic NRB.

Question 12

What is RNRB and what is the current rate?

Answer 12

The residence nil rate band applies to individuals who die on or after 6 April 2017 if they leave their home to a direct descendant. The current rate is £175,000.

Any surviving spouse can inherit the unused portion of the RNRB.

Question 13

What is the tax treatment of PET’s?

Answer 13

o Transfer is not chargeable at the point it is made.

o It becomes fully exempt if the transferor survives seven years from the date of the PET.

o If the transferor dies within seven years of making the PET, the PET `fails’ and becomes a chargeable transfer and thus subject to IHT.

Question 14

What is the tax treatment of an LCT?

Answer 14

o An LCT is a chargeable transfer when it is made. IHT is payable on the chargeable value of the LCT at the lifetime rate of 20%

o If the transferor survives seven years following the LCT, there is no further charge to tax

o If the transferor dies within 7 years, the LCT will be reassessed to tax at the death rate of 40% using NRB at the date of death.

Question 15

What is the tax treatment on death?

Answer 15

o Property in the taxable estate is valued at the price it might reasonably be expected to fetch if sold on the open market immediately before death.

o IHT is payable on a person’s death estate at the death rate of 40% of the value of the estate above the available NRB.

o In addition to the IHT of the death estate, any PETs or LCTs made in the 7 years before death must be re-assessed to IHT.

Question 16

What does cumulation mean?

Answer 16

Cumulation is used to prevent individuals reducing or avoiding an IHT liability by making a series of separate dispositions. Instead of viewing each chargeable transfer in isolation, HMRC consider other chargeable transfers made in the 7 years prior to the transfer being taxed

Cumulative total = total chargeable value of all chargeable transfers made in the previous 7 years to the transfer being taxed

As a consequence ……

Available NRB = Full NRB less cumulative total

Question 17

How do you calculate IHT on lifetime transfers?

Answer 17

STEP 1 calculate cumulative total

STEP 2 identify value transferred

STEP 3 apply exemptions and reliefs

STEP 4 apply NRB and calculate tax

STEP 5 apply taper relief

STEP 6 give credit for tax paid in lifetime

Question 18

How do you calculate IHT on death estate?

Answer 18

STEP 1 Calculate cumulative total

STEP 2 Identify assets included in the taxable estate

STEP 3 Value the taxable estate

STEP 4 Deduct debts/expenses

STEP 5 Apply exemptions & reliefs

STEP 6 Apply RNRB

STEP 7 Apply basic NRB and calculate tax

Question 19

What does TNRB allow for?

Answer 19

It allows a surviving spouse to take advantage of the unused portion of the deceased’s basic NRB.

Question 20

How does TNRB work?

Answer 20

The PRs of the surviving spouse can claim an increase in the survivor’s NRB equal to the unused percentage of the first spouse’s NRB.

The amount of the TRNB is equal to a percentage of the NRB sum on the date the survivor dies.

Question 21

What happens in relation to TNRB and outliving multiple spouses?

Answer 21

Individuals who have survived more than one spouse can claim the TNRB in respect of all of them, subject to a cap of 100% of a full nil rate band being transferred.

They can also pass this on to any subsequent spouse they have.

Question 22

How do PRs make a TNRB claim?

Answer 22

They must make a claim for the TRNB in the IHT return within two years of the end of the month of death (or within 3 months of the PRs first acting, if this is later).

If they fail to do so, anyone who is liable to pay the IHT on the surviving spouse’s death can make the claim after the deadline.

HMRC has discretion to extend the deadline.

If an individual survives more than one spouse, a separate claim should be made for each.

Question 23

What conditions need to be satisfied in relation to the RNRB?

Answer 23

1. The deceased died on or after 6 April 2017
2. Their death estate included a `qualifying residential interest’
3. The QRI was closely inherited' by a direct descendent’.

Question 24

What happens if part of the QRI is closely inherited but the other part is not?

Answer 24

Only the chargeable value of the share which is closely inherited is taken into account when calculating the RNRB.

Question 25

What happens if the property is worth less than the RNRB?

Answer 25

The RNRB amount is capped at the value of the deceased’s interest in the property.

Where the RNRB is claimed it is applied to the death estate as a whole rather than set-off against the gift of the property.

Question 26

What is the tapered withdrawal for RNRB?

Answer 26

Tapered withdrawal for estates with a net value (here this means the value of the assets which comprise the taxable estate, after debts have been deducted, but before exemptions and reliefs are applied) of more than £2million.

The reduction in the RNRB is £1 for every £2 above the £2 million threshold.

There is no RNRB for net estates worth £2,350,000 or more (or £2,700,000 where a full transferred RNRB applies).

Question 27

What does QRI mean?

Answer 27

It is a residential property interest which is part of the deceased’s estate immediately before they die.

Where the deceased had more than one residential property interest in their estate at death, the PRs must nominate one of them as their QRI.

Question 28

What are the conditions of a QRI?

Answer 28

A residential property interest is an interest in a dwelling-house which the deceased occupied as their residence at some point during their period of ownership.

It includes property in which the deceased did not live but intended to do so in due course.

It does not include rental properties in which the deceased never lived.

A dwelling-house can include garden/grounds

Question 29

What is the meaning of `closely inherited’?

Answer 29

A beneficiary closely inherits if they receive QRI by:

gift under the will

operation of the law of intestacy

operation of the rules of survivorship

Question 30

Who is unable to closely inherit?

Answer 30

Unless a specific exception applies, a beneficiary with a contingent interest following death does not `closely inherit’ for these purposes as they are not receiving an absolute interest.

Question 31

What is the meaning of `direct descendants’?

Answer 31

1. The deceased children, grandchildren, great-grandchildren and other lineal descendants
2. spouse or civil partner of anyone included above.
3. Widow, widower or surviving spouse of anyone included in 1. who has pre-deceased the deceased, provided the survivor does not re-marry or enter a new civil partnership before the deceased dies.

When considering 1. adopted children, step-children, foster children and children for whom the deceased was a guardian or special guardian are included.

Question 32

Who are not direct descendants?

Answer 32

The deceased’s siblings, parents, nieces, nephews.

Question 33

When might transferring the NRRB be available?

Answer 33

Where the spouse did not own a QRI or

they did not qualify for the RNRB because they left their QRI to someone who was not a lineal descendant.

A transferred RNRB can only be used if the surviving spouse leaves a QRI to a direct descendant.

Question 34

What are some of the conditions to transferring the RNRB?

Answer 34

The home the surviving spouse leaves to their direct descendant does not have to be the same house they lived in with the deceased spouse.

surviving spouse can increase the value of their RNRB by up to 100%.

The tapered withdrawal of the RNRB for net estates worth more than £2 million applies with reference to the total RNRB. Where the survivors estate could claim £350,000 RNRB this amount is reduced by £1 for every £2 in excess of £2 million, and no RNRB can be claimed for net assets worth £2,700,000 or more.

Question 35

What are the downsizing rules?

Answer 35

They allow an estate to qualify for RNRB even if the deceased did not own a QRI when they died.

The downsizing addition is only relevant if there is no QRI in the estate when the deceased died (but there was historically), or the value of the new QRI following a downsizing move is less than the current maximum RNRB.

Question 36

What conditions must be met for the downsizing rules to apply?

Answer 36

the deceased must have given away their QRI or downsized to a less valuable QRI on or after July 2015 (i.e. have lost the benefit of the full RNRB)

the former home would have been a QRI if it had been retained

a direct descendant inherits the replacement QRI and/or other assets

The amount of the addition is calculated with reference to the amount of the RNRB which would otherwise be lost because the former QRI is no longer owned.

Question 37

When must a claim for the downsizing addition be made?

Answer 37

A claim for the downsizing addition is made by the PRs within 2 years of the end of the month of death, not when the sale/gift of the former home takes place. However, details of the lifetime sale/gift will be needed by the PRs to bring the claim.

Question 38

When would the downsizing rules not be relevant?

Answer 38

· there is no loss of the RNRB because the value of any new QRI in the estate is the same/more than the maximum available RNRB, or,

· the RNRB is not available, because the new QRI or assets are not left to a direct descendant

Question 39

What is the maximum combined NRB?

Answer 39

£1 million