IHT: The charge to IHT Flashcards

Question

Is TNRB available in respect of a **chargeable lifetime transfer** made by a survivor (of someone who has had multiple spouses)? ## Footnote E.g. X's wife dies and they had 100% NRB left, X makes LTC, TNRB is not available for X here

Answer 1

No - TNRB is only available after the surviving spouse **dies**

Answer 2

No - as long as surviving spouse died after it

Answer 3

Within 2 years of the end of the month of their death (or within 3 months of the PRs first acting if this is later) - if they fail anyone else liable to pay IHT on surviving spouse's death can make claim after PRs deadline | No need to claim when first spouse dies

Answer 4

No - separate claim must be made for each TNRB | Even if only one TNRB needed (in case of error)

Answer 5

1. The deceased died **on/after 6 April 2017** 2. Their death estate included a **qualifying residential interest (QRI** 3. The QRI was **closely inherited** by a **direct descendent**

Answer 6

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

Answer 7

RNRB is capped at value of the property

Answer 8

**£2.7m** due to tapered withdrawal (reduction in RNRB of £1 for every £2 above £2 million) ## Footnote 2 = two Rs .7 = ???

Answer 9

A **residential property interest** which is part of deceased's estate immediately before death | If more than one - PRs must nominate one as QRI

Answer 10

An interest in a dwelling house which deceased occupied as their residence at some point during ownership | Does not include rental investment property ## Footnote Can include property deceased did not live in (because living in other job-related accom) but intended to

Answer 11

A closely inherits from deceased if they receive QRI by: * Gift under will (legacy or residue) * Intestacy * Rules of survivorship | Contingent interest does not mean closely inherit

Answer 12

1. Children, grandchildren and other lineal descendants (inc step, foster, adopted, and guardian) 2. Spouse or civil partner of anyone **in 1** 3. Widow/widower/surviving civil partner of anyone **in 1** who has predeceased the deceased provided the survivor does not re-marry | Not siblings, parents, nieces or nephews

Answer 13

Yes! As long as conditions for RNRB are met on the second death | I.e. surviving spouse leaves QRI to direct descendant

Answer 14

No! Deceased spouse need not have owned any QRI

Answer 15

Based on % of deceased's spouse remaining RNRB | Same as NRB ## Footnote So estate can qualify for RNRB of £350,000

Answer 16

For an estate to qualify for a **full RNRB** even where deceased did not own a QRI when they died (or value of QRI is less than RNRB [£175,000]) | I.e. if they sold off bigger home a few years ago

Answer 17

1. Deceased must have **given away QRI or downsized to less valuable QRI** on or after July 2015 2. Former home **would have been a QRI if retained** 3. **A direct descendant** inherits replacement QRI and/or other assets

Answer 18

Refernce to the amount of RNRB which **would otherwise be lost** because former QRI no longer owned (or less valuable one taken its place)

Answer 19

Downsizing rules do not apply

Answer 20

1. Calculate **cumulative total** (tells us how much NRB available for transfer) 2. Identify **value transferred** 3. Apply **exemptions and reliefs** 4. Apply **NRB and calculate tax** 5. Apply **taper relief** 6. Give credit for **tax paid in lifetime** | 5 and 6 for when IHT calculcated post-death ## Footnote Must be done for each gift individually!

Answer 21

No! PETs and LCTs made in the 7 years before death are reassessed to IHT but this is **separate** to the calculcation of IHT on the death estate! ## Footnote The above calculcation will be done for the initial 20% charged on LCTs as well as for the reassessment of failed PETs and LCTs

Answer 22

The value of all chargeable transfers made in the 7 years prior to the transfer - needed to know how much of NRB is available for transfer | **Chargeable** so does not include PETs if not died ## Footnote Must be done **for each gift individually!**

Answer 23

* Cumulation only takes into account chargeable transfers made in 7 year period * **But** where a LCT/PET is **reassessed** this can mean looking back as far as 14 years before transferor's death | See pg 135 of Wills ## Footnote E.g. if a PET was made 7 years before the transferor’s death, it will become chargeable when testator dies. It is then necessary to calculate the cumulative total for the failed PET based on the 7 years prior to the PET (i.e. the 7 year period starting 14 years before the death, during which time the deceased may have made an LCT).

Answer 24

* PETs made in seven years and become chargeable = both fail * LCT made more than 7 years ago = not reassessed following death but still relevant to cumulative total for PET 1

Answer 25

Reference to **loss in value to the donor** at the date of the transfer

Answer 26

After applying relevant exemptions/reliefs | Annual exemption **always** considered

Answer 27

NRB is reduced by value of cumulative total (step 1) - apply 0% up to value of remaining taxable estate up to NRB amount. Apply relevant rate to rest to establish IHT due

Answer 28

a) LCT when first made = NRB at **date of transfer** b) Failed PET or re-assessed LCT = NRB amount at **date of death**

Answer 29

1. Tax due immediately on LCT = 20% (last step in calculcation 2. Reassessing lifetime transfer because died within 7 years = 40% | If died within 3-7 years, is necessary to apply taper relief

Answer 30

Depending on how long ago the transfer was, a certain reduction is made in amount of IHT due

Answer 31

* 0-3 years before death = no taper * 3-4 years = 20% * 4-5 years = 40% * 5-6 years = 60% * 6-7 years = 80% | Figures above are **reduction** but can be reversed for **payable** ## Footnote Can remember that 6-7 years will be 80% (as afterwards will be 100% as exempt), so count down 20% every 2 years back from there

Answer 32

IHT previously paid on LCT (i.e. the 20%) is deducted from that due on death (after taper relief applied) | Will not obtain a refund if balance is negative

Answer 33

1. Calculate cumulative total (rmb to include AE) 2. Identify assets included in the taxable estate 3. Value the taxable estate 4. Deduct debt/expenses 5. Apply exemptions & reliefs 6. Apply RNRB 7. Apply basic NRB and calculcate tax

Answer 34

Value of all chargeable transfers with exemptions **accounted for** made in 7 years prior to death

Answer 35

All property to which the deceased was beneficially entitled at the date of death is included in estate for IHT purposes (both UK property and abroad) ## Footnote NB rules determining inclusion in a person's estate for **tax purposes** different to those which govern property included in **succession estate**

Answer 36

* **All jointly owned property** * **Property subject to a reservation** * DMCs (deathbed gift remains part of estate for IHT purposes) * Statutory nominations (e.g. to Friendly Society, max £5,000) * **Some interests in possession**

Answer 37

* **Tenant in common** - share passes into estate (same way succession) * **Joint tenants** - deemed severance immediately before death; deceased's share included in taxable estate (e.g. house owned as joint tenants with sibling worth £400,000 - will be taxed on your share of £200,000)

Answer 38

When the benefit of an asset given away during lifetime is reserved by the donor (value of asset at date of death included) ## Footnote E.g. parents transfer legal ownership of property to children on condition they can use it as they please = parents have retained benefit and value of holiday cottage will be included for IHT purposes

Answer 39

1. Not deriving a benefit from assets given away 2. Paying market value rent when they do derive benefit

Answer 40

Included in tenant's taxable estate when life tenant died | Treated as being owned by life tenant for IHT purposes ## Footnote E.g. Amir died last week - estate worth £200,000 - was also life tenant of trust created in 2004; capital value at Amir’s death is £150,000 Taxbale value of Amir’s estate = £350,000 as it includes value of trust fund

Answer 41

* Life interest trust created following someone's death (i.e. by will) = capital value **included in taxable death estate** * New inter vivos trust created during lifetime of settlor on/after 22 March 2006 = **not included in taxable estate** ## Footnote E.g. woman died last week owning £200,000 assets - was also life tenant of trust created following father’s death in 2012. Capital value of trust at creation was £30,000 but increased to £50,000 when woman died. Taxable value of women’s estate is £250,000 because it includes value of trust fund when she dies (life interest trust created following death of father = had an immediate post death life interest)

Answer 42

Will always be taxed on life interest in a trust **unless** it was created during the lifetime of the settlor after March 2006 * Included in taxable death estate = interests in possession trust created before March 2006, interest in possession trust created after Marh 2006 following someone's death * Not included in taxable death estate = interest in possession trust created after March 2006 during lifetime of settlor

Answer 43

* **Excluded property** * Insurance policy written on trust (only if proceeds **not payable** to deceased's estate) * Discretionary pension schemes (**deemed not to be entitled to money** [even with expression of wish]; despite any amount that may be paid to TP or deceased's PRs i.e. any discretionary lump sum made by fund Ts not included in taxable estate) | Sum payable on death written in trust for another = not included ## Footnote Pension lump sums payable **by right** to estate of deceased = included in taxable estate

Answer 44

Most common is remainder interest in life interest trust - if remainderman dies before life tenant = trust fund that would have passed to them not included in remainderman's taxable estate | Where life tenant dies = trust fund included

Answer 45

At the market value at the date of death | Subject to special rules on related and joint property

Answer 46

Assets owned by **spouses** that are worth more when valued together (e.g. a set of paintings) = each **share is valued at proportionate share of combined value** ## Footnote E.g. A set of two vases is worth £100,000 but each vase alone is only worth £20,000. If the vases are owned one each by a husband and wife, for IHT purposes each party’s share will be valued at half the value of the combined pair i.e. £50,000, and not at the stand-alone value of the one vase each party in fact owns (£20,000).

Answer 47

The value of the deceased's share is reduced by 10% (to reflect difficulty in sharing it) ## Footnote E.g. Two siblings own a house together in equal shares. The whole house is worth £300,000. Each half share is therefore worth £150,000. When the first sibling dies, their taxable estate will include the value of the jointly owned asset as £135,000 (90% of £150,000).

Answer 48

No - **related property** rules aply and take priority ## Footnote NB for the **gross** estate, include the half share in joint property, THEN deduct for exemption

Answer 49

Not generally, nor does other jointly owned property

Answer 50

1. Deceased's debts/liabilities at date of death (e.g. credit card) 2. Post-death expenses (**reasonable** funeral expenses and cost of tombstone **only**)

Answer 51

* Charity exemption * Spouse exemption (e.g. wife's share of house - £250,000 - passes to husband tax-free) * Business Property Relief * Agricultural Property Relief

Answer 52

Apply (transferred) RNRB and NRB - reduce by cumulative total - tax 0% up to this amount - tax 40% on rest to establish IHT due

Answer 53

1. Tax due as a result of transferor dying within 7 years of making lifetime transfer (LCT and failed PETs) 2. Tax due as a result of deemed transfer of death estate Timing important as it does not only affect amount of IHT payable on transfers themselves, but also cumulative total on death and therefore IHT payable overall

Answer 54

* **Liability** = who is liable for paying IHT due * **Burden/incidence** = which assets are used to fund the tax charge

Answer 55

The person in whom the assets vest (donee) is liable to pay IHT ## Footnote Will be the Ts of the trusts which receives the assets - payment made using settled assets (trust fund) and Bs have smaller trust fund

Answer 56

The **donor** becomes liable (but may elect to pay tax anyway) | Loss is effectively "assets settled + IHT liability"

Answer 57

No - calculated with reference to the **grossed-up value** (notionally increasing original value) | More tax paid where grossing-up required

Answer 58

The lifetime recipient (donee) liable to pay IHT due | I.e. recipient of failed PET primarily liable to pay IHT due ## Footnote Will be Ts in the case of an LCT (using assets in trust fund)

Answer 59

The PRs of the deceased become liable | Estate funds used so burden effectively falls on residuary Bs

Answer 60

The succession assets that pass to PRs to be administered under will/intestacy rules | Cf assets that pass outside of succession estate ## Footnote NB both included in IHT, just need to separate here for purposes of knowing **who** is liable

Answer 61

No - but it can affect rules on **who is liable to pay** tax and where the burden of payment falls E.g. value of estate subject to tax is £400,000 (share of house worth £300,000 + bank accounts worth £100,000) = total tax due apportionaed between free estate and joint property | I.e. **amount** will always be the same, just affects who pays ## Footnote In practice - calculate total IHT and apportion between free estate and other taxable items

Answer 62

* IHT is payable from **residue** unless a **contrary intention** is shown * The PRs are **liable** to pay

Answer 63

Deemed to be given **free of tax** (because IHT is payable from the residue)

Answer 64

* Gifts within will paid subject to deduction of IHT attributable to them (relieves burden for residuary Bs) * Residue bears the burden of IHT due re assets outside free estate (increases burden for residuary Bs) ## Footnote E.g. I give £100 to my neighbour Charlie subject to the payment of inheritance tax” * Assets taxed at 40% - Charlie would receive £60 * IHT shared so residuary Bs better off

Answer 65

No prescribed wording but gifts often drafted as "subject to" or "free of" IHT os no doubt over testator's intention

Answer 66

A reference to 'tax' usually construed as tax payable **only on dispositions made by the will** - so general direction that "all taxes" should be paid from residue = only tax payable on property **passing under will** (rather than lifetime gifts)

Answer 67

Obviously not - is the burden/incidence of IHT affected

Answer 68

Ineffective - would be no part of estate that could be used to pay IHT

Answer 69

The items bear the burden of IHT attributable to them and **liability for payment falls on the B of the item** * Joint tenant property = surviving co-owner * Statutory nominations = nominated B * Donationes mortis causa = lifetime donee * Trust assets = T * GROB = lifetime donee ## Footnote Rmb in cases of joint tenant property, if it was left to spouse there would be no tax on it anyway

Answer 70

With reference to the value of the asset relative to the value of the whole estate ## Footnote E.g. woman dies leaving taxable estate of bank account (£150,000), share of joint property with sister (£300,000) and made a GROB to son before dying (£150,000) * PRs liable for 1/4 of IHT (will use cash from free estate) * Woman's sister liable for 1/2 IHT (will have to sell house or use own cash funds) * Woman's son liable for 1/4 IHT (could sell gifted item or use own funds)