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Wills & Administration of Estates > IHT: The charge to IHT > Flashcards

IHT: The charge to IHT Flashcards

1
Q

What is inheritance tax?

A

A tax primarily paid on the estate of a deceased person

Applies to UK assets of UK residents taxpayers and worldwide assets of UK-domiciled taxpayers

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2
Q

What are the current rates of tax?

A

NRB - 0%
Lifetime rate - 20%
Death rate - 40%

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3
Q

What are the 3 IHT trigger events?

A
  1. PETs
  2. LCTs
  3. Death
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4
Q

What is a PET (potentially exempt transfer)?

A

Lifetime transfers of value which could become chargeable to IHT depending on whether transferor survives for seven years after transfer

Relevant value = amount by which transferor’s estate is reduced

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5
Q

Will PETs only be money?

A

No

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6
Q

What is the tax treatment of a PET? What will its value be?

A

Transferor survives 7 years from PET = exempt
Transferor dies within 7 years from PET = fails; becomes chargeable and subject to IHT (at value it was when it was made)

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7
Q

What are LCTs (lifetime chargeable transfers)?

A

Lifetime transfers of value into a trust which are immediately chargeable to IHT at the lifetime rate

Relevant value - amount by which transferor’s estate is reduced

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8
Q

What is the tax treatment of LCTs?

A
  • When made = IHT payable on chargeable value of LCT at lifetime rate of 20% (using normal step-by-step method)
  • Transferor dies within 7 years = reassessed at death rate of 40% using NRB at date of death

If transferor survives 7 years = no further charge to tax

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9
Q

What is the transfer that occurs when someone dies?

A

Deemed transfer of all the assets they own, on which IHT is chargeable

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10
Q

How is property in taxable estate valued?

A

Valued at the price it might reasonably be expected to fetch if sold on open market immediately before death

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11
Q

Is the taxable death estate the same as the succession estate?

A

NOOOOO!! Separate calculcations

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12
Q

What is the tax treatment of the death estate?

A

Taxed at death rate of 40% - on value of estate above available NRB

PETs and LCTs made in last 7 years before death reassessed to IHT

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13
Q

What is a ‘chargeable transfer’?

A

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

Not just money!

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14
Q

What is a ‘transfer of value’?

A

A disposition which results in an immediate decrease of the individual’s estate

Basically means gifts

Applies to all forms of property; anything with monetary value

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15
Q

Is a transaction at an undervalue a gift?

A

Yes - the difference in value = gift

e.g. selling your house to a family member for less than it is worth – the difference in value = gift

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16
Q

How is the value of the transfer calculcated?

A
  • Lifetime transfers = loss in value to the donor
  • Death estate = market value of items on the date of death
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17
Q

What is the effect of the NRB?

A

Individuals can make £325,000 worth of chargeable transfers at a rate of 0% (no tax)

NB if they use this all up, death estate taxed at 40% as no NRB left!

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18
Q

What is the transferrable nil rate band (TNRB)?

A

The unused portion of a deceased partner’s NRB that a surviving spouse/CP can inherit

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19
Q

What is the residence nil rate band (RNRB)?

A

An additional nil rate band (£175,000) for individuals who on/after 6 April 2017 if they leave their family home to direct descendants

Unused portion can also be inherited by surviving spouse/CP

Applies to death estate as a whole

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20
Q

What is the cumulative total?

A

The total chargeable value of all chargeable transfers made in the previous 7 years

Available NRB = full NRB less cumulative total

Exemptions included when figuring out, e.g…

Failed PET of £10,000 to grandson’s marriage =
1. Minus marriage exemption (£2,500) = £7,500
2. Minus two AEs (£6,000) = £1,500

Failed PET of £10,000 to charity in same tax year =
1. Minus charity exemption (£10,000 [100%] = £0

Cumulative total = £48,500

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21
Q

How does the TNRB work?

A

PRs of the surviving spouse can claim an increase in the NRB equal to the unused proportion of the first spouse’s NRB

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22
Q

Is the amount of TNRB the % of unused NRB or unused amount?

A

%!

This way taxpayer benefits if there is an increase in the NRB threshold

E.g. NRB when first spouse died was £312,000, and £325,000 when second spouse died. TNRB calculcated with reference to the £325,000. If first spouse to die had used 50% of NRB, second spouse has uplift of £162,500, rather than £156,000

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23
Q

If an individual has survived more than one spouse, can TNRB be claimed in respect of all of them?

A

Yes - subject to a 100% NRB being transferred

Individuals who would be entitled to claim a TNRB re a previous marriage can also pass this on to any subsequent spouse (again capped at 100%)

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24
Q

What can individuals who would be entitled to claim a TNRB with regards to a previous marriage do in the case of a subsequent spouse?

A

Can pass it on to any subsequent spouse (again capped at 100%)

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25
Q

Is TNRB available in respect of a chargeable lifetime transfer made by a survivor (of someone who has had multiple spouses)?

E.g. X’s wife dies and they had 100% NRB left, X makes LTC, TNRB is not available for X here

A

No - TNRB is only available after the surviving spouse dies

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26
Q

Does it matter if the first spouse died before the introduction of the TNRB?

A

No - as long as surviving spouse died after it

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27
Q

When do the PRs of the surviving (now dead) spouse need to make a TNRB claim?

A

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

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28
Q

Is one claim enough for all spouses survived?

A

No - separate claim must be made for each TNRB

Even if only one TNRB needed (in case of error)

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29
Q

What are the 3 conditions of a residence nil rate band (RNRB)?

A
  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
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30
Q

What if part of QRI closely inherited and other part not?

A

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

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31
Q

What happens where the deceased’s interest/share in property is worth less than £175,000?

A

RNRB is capped at value of the property

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32
Q

How much does an estate have to be woth to mean RNRB cannot be claimed?

A

£2.7m due to tapered withdrawal (reduction in RNRB of £1 for every £2 above £2 million)

2 = two Rs
.7 = ???

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33
Q

What is a qualifying residential interest?

2nd condition for RNRB

A

A residential property interest which is part of deceased’s estate immediately before death

If more than one - PRs must nominate one as QRI

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34
Q

What is a residential property interest?

A

An interest in a dwelling house which deceased occupied as their residence at some point during ownership

Does not include rental investment property

Can include property deceased did not live in (because living in other job-related accom) but intended to

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35
Q

What does closely inherited mean?

3rd condition for RNRB

A

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

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36
Q

What is a direct descendant (of deceased)?

Condition 3 for RNRB

A
  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

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37
Q

Can the RNRB be transferred to the surviving spouse even if the deceased did not own a QRI or did and left it to someone who was not a lineal descendant?

A

Yes! As long as conditions for RNRB are met on the second death

I.e. surviving spouse leaves QRI to direct descendant

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38
Q

Does the QRI left by the surviving spouse to a direct descendant have to be the house they lived in with the deceased spouse?

A

No! Deceased spouse need not have owned any QRI

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39
Q

How much is the RNRB increased if RNRB is transferred?

A

Based on % of deceased’s spouse remaining RNRB

Same as NRB

So estate can qualify for RNRB of £350,000

40
Q

What do the downsizing rules allow?

A

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

41
Q

How does someone qualify for the downsizing rules?

A
  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
42
Q

How is the addition of RNRB calculcated?

A

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

43
Q

What if value of any new QRI in estate is same or more than max RNRB or RNRB is not available because new QRI/assets not left to direct descendant?

A

Downsizing rules do not apply

44
Q

What is the formula for calculating IHT on lifetime transfers?

A
  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

Must be done for each gift individually!

45
Q

CLARIFIER: Do lifetime transfers form part of the death estate?

A

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!

The above calculcation will be done for the initial 20% charged on LCTs as well as for the reassessment of failed PETs and LCTs

46
Q

What is the cumulative total?

Step 1

A

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

Must be done for each gift individually!

47
Q

Will calculating the cumulative total ever mean looking beyond 7 years before transferor’s death?

A
  • 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

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).

48
Q

See example

A
  • 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
49
Q

How do we identify value transferred?

Step 2

A

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

50
Q

When do we reach the chargeable value?

Step 3

A

After applying relevant exemptions/reliefs

Annual exemption always considered

51
Q

How is the NRB applied?

Step 4

A

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

52
Q

Does RNRB apply to lifetime transfers?

A

No

53
Q

Which NRB is applicable to a) LCT when first made and b) failed PET or re-assessed LCT?

A

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

54
Q

What rate is applied after deducting the NRB?

A
  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

55
Q

How is taper relief applied?

Step 5

A

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

56
Q

What are the taper relief rates?

A
  • 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

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

57
Q

How is credit given for tax paid in lifetime?

Step 6

A

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

58
Q

What are the steps for calculating the IHT due on the death estate?

A
  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
59
Q

How are exemptions considered when calculating the cumulative total?

Step 1

A

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

60
Q

What is the general rule for assets included in the taxable estate?

Step 2

A

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)

NB rules determining inclusion in a person’s estate for tax purposes different to those which govern property included in succession estate

61
Q

What assets are included in taxable estate?

(Surprising ones)

A
  • 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
62
Q

How is jointly owned property included in the taxable estate?

A
  • 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)
63
Q

What is property subject to reservation?

A

When the benefit of an asset given away during lifetime is reserved by the donor (value of asset at date of death included)

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

64
Q

How can individuals avoid gift with reservation of benefit (GROB) rules?

A
  1. Not deriving a benefit from assets given away
  2. Paying market value rent when they do derive benefit
65
Q

What is the rule for interests in possession trusts created before March 2006?

A

Included in tenant’s taxable estate when life tenant died

Treated as being owned by life tenant for IHT purposes

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

66
Q

What is the rule for interests in possession trusts created after March 2006?

A
  • 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

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)

67
Q

So when will interest in a life interest trust be taxed as part of the death estate?

A

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
68
Q

What assets are excluded from the taxable estate?

A
  • 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

Pension lump sums payable by right to estate of deceased = included in taxable estate

69
Q

What is excluded property?

A

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

70
Q

How are the assets in the estate valued for tax?

Step 3

A

At the market value at the date of death

Subject to special rules on related and joint property

71
Q

What are the rules on related property when valuing the taxable estate?

E.g. set of antique chairs

A

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

I.e. a set of 2 with her husband (one chair her husband owns and one she is giving to son)

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).

72
Q

What are the rules on joint property when valuing the taxable estate?

Whether co-owned as joint tenants or tenants in common

A

The value of the deceased’s share is reduced by 10% (to reflect difficulty in sharing it)

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).

73
Q

Do the joint property rules apply to married couples?

A

No - related property rules aply and take priority

NB for the gross estate, include the half share in joint property, THEN deduct for exemption

74
Q

Do chattels attract this discount?

A

Not generally, nor does other jointly owned property

75
Q

What debts are deducted?

Step 4

A
  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)
76
Q

What 4 exemptions/reliefs can be deducted from the death estate?

Step 5

A
  • Charity exemption
  • Spouse exemption (e.g. wife’s share of house - £250,000 - passes to husband tax-free)
  • Business Property Relief
  • Agricultural Property Relief
77
Q

What happens once taxable death estate has been calculated?

Step 6 and Step 7

A

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

78
Q

What two separate IHT calculations may be required on someone’s death?

A
  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

79
Q

What does liability and burden/incidence mean?

A
  • Liability = who is liable for paying IHT due
  • Burden/incidence = which assets are used to fund the tax charge
80
Q

What is the general rule for LCTs re liability and burden?

A

The person in whom the assets vest (donee) is liable to pay IHT

Will be the Ts of the trusts which receives the assets - payment made using settled assets (trust fund) and Bs have smaller trust fund

81
Q

What happens if the Ts of an LCT do not pay tax?

A

The donor becomes liable (but may elect to pay tax anyway)

Loss is effectively “assets settled + IHT liability”

82
Q

Is the IHT payable calculated with reference to the value settled when T pays

A

No - calculated with reference to the grossed-up value (notionally increasing original value)

More tax paid where grossing-up required

83
Q

What is the general rule for lifetime transfers taxed following death re liability and burden?

A

The lifetime recipient (donee) liable to pay IHT due

I.e. recipient of failed PET primarily liable to pay IHT due

Will be Ts in the case of an LCT (using assets in trust fund)

84
Q

Are assets in the death estate used to meet IHT liabilities of taxed lifetime transfers?

A

No!

85
Q

What happens if the recipient of a lifetime transfer does not pay IHT due within 12 months from the date of death?

A

The PRs of the deceased become liable

Estate funds used so burden effectively falls on residuary Bs

86
Q

What is meant by the ‘free estate’?

A

The succession assets that pass to PRs to be administered under will/intestacy rules

Cf assets that pass outside of succession estate

NB both included in IHT, just need to separate here for purposes of knowing who is liable

87
Q

Does the fact of whether or not asset is part of the free estate have an effect on the overall IHT payable?

A

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

In practice - calculate total IHT and apportion between free estate and other taxable items

88
Q

What is the general rule for paying IHT on the free estate?

A
  • IHT is payable from residue unless a contrary intention is shown
  • The PRs are liable to pay
89
Q

What is the general rule of construction for gifts in a will in terms of the burden of tax?

(Other than residue)

A

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

90
Q

What variations could be made through a contrary intention?

To relieve/increase burden for residuary Bs

A
  • 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)

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

91
Q

What constitutes a contrary intention?

A

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

92
Q

If a testator wants to vary incidence of IHT as between lifetime transfers and death estate (i.e. direct that IHT due in respect lifetime gifts should be met from residue and so relieve the lifetime donee of this burden), why must they use clear words?

A

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)

93
Q

Can variations to the rule remove or reduce liability overall?

A

Obviously not - is the burden/incidence of IHT affected

94
Q

What is the effect where a will gives all gifts “free of tax”?

A

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

95
Q

What is the general rule for taxable assets that fall outside of the free (succession) estate?

A

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

Rmb in cases of joint tenant property, if it was left to spouse there would be no tax on it anyway

96
Q

How is the proportion owed by each B calculated?

A

With reference to the value of the asset relative to the value of the whole estate

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)

Wills & Administration of Estates (13 decks)

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