IHT: The charge to IHT

Question 1

IHT death rate?

Answer 1

40%

Question 2

IHT lifetime rate?

Answer 2

20%

Question 3

Three kinds of IHT trigger events

Answer 3

Potentially exempt transfers (PET) - lifetime transfers of value which could become chargeable to IHT depending on whether the transferor survives for 7 years after the transfer. Only failed PETS are chargeable.

Lifetime Chargeable Transfers (LCT) - Lifetime transfers of value which are immediately chargeable to IHT at the lifetime rate. Reassessed if transferor dies within seven years.

Death - When a person dies there is a deemed transfer of value.

Question 4

Do gifts count as transfers of value?

Answer 4

Yes.

Even if something is sold at an undervalue to your family or friend, the difference in value will be considered a gift.

Question 5

How are transfers of value valued?

Answer 5

Lifetime: reference to the loss in value to the donor.

Death: reference to the market value of items in the estate at date of death.

Question 6

How much is the nil rate band?

Answer 6

£325,000

Question 7

How much is the residence nil rate band?

Answer 7

£175,000

Question 8

Inheriting nil rate bands

Answer 8

An individual’s surviving spouse can inherit the unused portion of the basic NRB. This is calculated as a percentage proportion of the unused NRB.

Known as ‘transferable nil rate band.

Can inherit from multiple spouses if married multiple times - but can only claim a TNRB up to 100% the value of thier own.

RNRBs can also be inhertied.

Question 9

Tax treatment of PET

Answer 9

• transfer is not chargeable at the point it is made
• becomes fully exempt if the transferor survives 7 years from the date of the PET
• If dies within seven years of making the PET, PET fails and becomes subject to IHT

Question 10

Tax treatment of LCTs

Answer 10

• IHT payable immediately at 20%
• If survives 7 years there is no further tax
• If dies within 7 years may be reassessed

Question 11

Cumulation

Answer 11

Cumulative total = total chargeable value of all chargeable transfers made in the previous 7 years.

This reduces the NRB available for the transfer under consideration.

Question 12

Calculate IHT on lifetime transfers

Answer 12

For a failed PET or LCT:

Step A: Calculate cumulative total
Step B: Identify value transferred
Step C: Apply exemptions and reliefs
Step D: Apply basic NRB and calculate tax
Step E: Apply taper reliefs
Step F: Give credit for tax paid in lifetime

Question 13

RNRB - conditions

Answer 13

Deceased died on or after 6 April 2017

Their death estate included a qualifying residential interest

The QRI was closely inherited by a direct descendant.

Tapered after net value of £2M. Not available for estates worth £2,350,000 or more (2,700,00 where transferred RNRB applies).

Question 14

What is a qualifying residential interest?

Answer 14

A QRI is a residential property interest part of deceased estate.

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.

Question 15

RNRB: closely inherited

Answer 15

Beneficiary receives by way of:
- gift under the will
- intestacy
- rules of survivorship

Specific exemption: if someone inherits it as a contingent interest they will not qualify.

Question 16

Meaning of direct descendants

Answer 16

1. children, grandchildren, great-grandchildren etc
2. Spouse or civil partner of anyone included in 1
3. Widow, widower of anyone included in 1 who pre-deceased anyone in 1

Question 17

Annual exemption

Answer 17

Applies to lifetime transfers:

£3000

Question 18

Taper relief

Answer 18

0-3 years: no taper

3-4: 20% reduction in IHT due

4-5: 40% reduction in IHT due

5-6: 60% reduction in IHT due

6-7: 80% reduction in IHT due

Question 19

Calculate IHT on death

Answer 19

1. Calculate cumulative total
2. Identify assets included in the taxable estate
3. Value the taxable estate
4. Deduct debts/expenses
5. Apply exemptions and reliefs
   6: Apply RNRB
   7: Apply basic NRB and calculate tax

Question 20

Assets specifically excluded from the taxable estate

Answer 20

• Excluded property (i.e. was the remainderman when the life tenant was still alive)
• Insurance policies written in trust for a third party
• Discretionary pension schemes

Question 21

Life interests in trusts tax rules

Answer 21

Trusts created before March 2006: all trusts in which the deceased had a life interest will be be included in their taxable estate.

Trusts created after 2006:
- if the trust was created during the lifetime of the settlor it is not included in the life tenant’s taxable estate
- if the trust was created following someone’s death it’s value will be included in the life tenant’s taxable estate

Question 22

Valuing taxable estate: joint property

Answer 22

Where land is co-owned by people who are not married deduction of 10% is applied to reduce the taxable share.

Related property: If property is related but owned separately (eg husband and wife) - and the value together is worth more - the value will be taken as half the value of the items together.

Question 23

Which liabilities are deductible for IHT?

Answer 23

• income tax
• pre-death liabilities (i.e. credit card)
• funeral

Note: legal fees cannot be deducted but can still be paid for by the estate

Question 24

Who pays IHT on a LCT?

Answer 24

The general rule is that the person in whom the assets vest is usually liable to pay IHT - this would be the trustee.
If trustee does not pay the tax the donor becomes liable.

Donor can elect to pay from the outset.

Question 25

Who pays IHT on a lifetime transfer following death?

Answer 25

The general rule is that the person in whom the assets vest is usually liable to pay IHT.

Assets in the death estate are not used to meet these liabilities.
But if not paid within deadline for payment (12 months) the PRs will become liable.

PRs should therefore make sure there are sufficient funds to cover this should the need to pay arise.

Question 26

Who is liable to pay IHT on a joint tenant property?

Answer 26

The surviving co-owner

Question 27

Who is liable to pay IHT on a statutory nomination?

Answer 27

The nominated beneficiary

Question 28

Who is liable to pay IHT on a DMC?

Answer 28

The donee

Question 29

Who is liable to pay IHT on a Trust asset?

Answer 29

The trustee

Question 30

Who is liable to pay IHT on a GROB?

Answer 30

The lifetime donee.