Inheritance Tax

Question 1

What are the implications for a person who is UK domiciled or UK deemed domiciled with regards to IHT?

Answer 1

If an individual is UK domiciled or deemed domiciled then they will have to pay IHT on transfers of their worldwide assets.

If an individual is not Uk domiciled or deemed domiciled, then they only have to pay IHT on their UK transfers.

Question 2

What are the 3 ways an individual can be domiciled?

Answer 2

Domicile of origin: Born with your dads domicile.
Domicile of dependency: Follow your dads domicile (under 16)
Domicile of choice: Sever all ties of previous domicile to select new domicile.

Question 3

What conditions need to be met in order for a person to be DEEMED DOMICILED with regards to IHT, when a transfer has been made?

Answer 3

1. They were domiciled in the UK within 3 years of the transfer being made.
2. The individual was formerly UK resident:
   Born in the UK
   UK domicile of origin
   UK resident in relevant tax year
   Was UK resident in at least 1 of the 2 tax years immediately before the relevant tax year.
3. The individual is Long term UK resident for 15 of the last 20 years and UK resident in 1 of the last 4 relevant tax years.

Question 4

How do you determine if an asset is situated in the UK or Overseas?

Answer 4

Land and building are in the country which they are located in.
A debt is in the country of residence of the debtor.
Life policies are in the country where proceeds are payable.
Shares and securities are in the country where they are registered.
Bearer securities are where the certificate of title is located.
Bank accounts are at the branch where the account is kept.
An interest in a partnership is where the business is carried on.
Goodwill is where the business is carried on.
Tangible property i.e. chattel is at the physical location.

Question 5

How does DTR work with regards to the transfer of an overseas asset?

Answer 5

When a transfer is made of an overseas asset both UK IHT and overseas capital gains tax may be payable.

DTR is available against the UK IHT for the overseas tax paid.

Question 6

What is a gift with a reservation of benefit?

Answer 6

A gift where a transfer of an asset is made by an individual but some reservation of benefit is retained by that individual. i.e. a parent sells their house to their child, but still lives in the house without paying the market rent…

Question 7

What is the benefit of making a deed of variation?

Answer 7

The benefit of making a deed of variation is that changes made to the will , can makes transfers from the deceased more tax efficient.

Question 8

What is the definition of a trust?

Answer 8

A legal arrangement under which a settlor transfers property to trustees who are required to deal with the property on behalf of the beneficiaries.

Question 9

What is the difference between an interest in possession trust and a discretionary trust?

Answer 9

An interest in possession trust is where the settlor has instructions that a trustee must follow when distributing their property to the beneficiary.

A discretionary trust is where the property left by the settlor is distributed at the discretion of the trustee to the beneficiary.

Question 10

When is the IHT due for a lifetime transfer?

Answer 10

If the transfer is made between the 6 April and the 30 September then the tax is due by the 30th April the following year.

If the transfer is made during any other time then the tax is due 6 months from the end of the month of the transfer.

Question 11

When is IHT due with regards to the death estate?

Answer 11

IHT is due 6 months after the end of the month of the transfer.

Question 12

What are the circumstances where inheritance tax can be paid in instalments?

Answer 12

IHT can be paid in 10 instalments when dealing with: 
Land
Shares where the donor had control
High value unquoted shares
Business or interest in a business

Question 13

What are examples of excepted transfers, which are outside of the scope of IHT?

Answer 13

Examples of excepted assets are overseas property held by an individual who is not UK domiciled or deemed domiciled.

Question 14

What is the diminution in value?

Answer 14

In IHT the diminution in value means that when we make a transfer we calculate the transfer value based on how much the donors value has been reduced by as opposed to how much the market value of the transfer is.

Question 15

What are examples of exempt lifetime transfers?

Answer 15

Small gifts (less than £250)
Normal expenditure out of income
Marriage (£5000 mum and dad) (£2500 grandparent or spouse)
(Anyone else £1000)
Gifts covered by annual exemption

Question 16

What are examples of gifts that are exempt in lifetime and death?

Answer 16

Gifts to charities.
Gifts to qualifying political parties.
Gifts for national purposes.

Question 17

What is a chargeable lifetime transfer?

Answer 17

CLTS’s are gifts to a trust. They are chargeable at the time of the gift so that lifetime IHT may be payable.

If the donor dies within seven years of making a CLT, additional IHT may become payable on death.

Question 18

What is a potentially exempt transfer? (PET)

Answer 18

Any other gift, ie a gift to an individual other than a spouse or civil partner are PET’s.

A PET is treated as exempt during donor’s lifetime so no lifetime IHT is payable.

If the donor dies after 7 years from when the PET was transferred then NO IHT is payable.

If the donor dies within 7 years of making the PET then the PET becomes chargeable and IHT may become due on it.

Question 19

What are the steps to an inheritance lifetime tax computation?

Answer 19

Prepare a timeline and mark on CLT’s and PET’s
Value each gift remembering the diminution in value principle.
Deduct valuation reliefs BPR and APR
Deduct exemptions. Remember annual exemptions are deducted in date order.
For each CLT deduct available nil rate band which is the NRB at the time of the gift less any CLT’s in the 7 years before the gift.
Tax the excess over the amount at 25% if the donor is paying and 20% if the donee is paying the IHT.

Question 20

What are the steps for calculating the IHT payable on CLT’s and PET’s at death?

Answer 20

Use the timeline prepared for working out lifetime IHT. Mark seven years before the donors death.

Delete all PET’s more than 7 years before death.

Start with the earliest gift within 7 years of death.

IHT is charged on the value of the gift after reliefs and exemptions.

Deduct available NRB’s which is the NRB at the time of death less any previous chargeable transfers in the 7 years before that gift. Previous chargeable transfers are CLT’s and PET’s that have become chargeable.

Tax excess over available NRB at 40%

Deduct any taper relief.

Question 21

What is the residence nil rate band?

Answer 21

The RNRB is a relief that is available if an individual died on or after 6 April 2017.

The individual must also have owned a home which they live in and forms part of their death estate.

The main residence must also be passed on to an individuals direct descendants e.g. children or grandchildren.

The RNRB is the lower of 175,000 for 2020/21 plus any transferred RNRB from a spouse of civil partner.

OR

The value of the main residence being passed to the descendant.

Question 22

When is the RNRB tapered?

Answer 22

The RNRB is tapered when an individuals net estate exceeds £2,000,000. It is tapered by £1 for every £1 above £2,000,000 so when the net estate is above £2,350,000 the RNRB is tapered to nil.

Net estate is before any reliefs or deductions.

Question 23

How do you treat unused NRB if the NRB was different at the time the individuals partner passed?

Answer 23

You work out the percentage of how much NRB is unused and apply that percentage to the relevant NRB.

Question 24

What is meant by relief for fall in value?

Answer 24

If an asset falls in value after is transferred then a claim can be made for the lower amount of the gift to be used when calculating the death IHT.

HOWEVER

The original value must be used when calculating the NRB on other gifts.

Question 25

What are the related property rules in IHT?

Answer 25

Any property that the individual or their spouse or civil partner own must be considered when an IHT transfer has been made.

When calculating the value of the transfer we always use the higher value between comparing the transfer with or without the related property rules.

Question 26

What is business property relief?

Answer 26

Business property relief is where relief is given to relevant business property transferred.

Question 27

What are examples of the relevant business property?

Answer 27

Unincorporated business/partnership 100% relief
Shares in an unquoted trading company 100% relief
Securities in an unquoted company 100% relief
Shares or securities in a quoted company 50% relief
Land, buildings, plant and machinery owned by donor and used in partnership 50% relief

Question 28

What are the conditions that must be satisfied for BPR?

Answer 28

The donor must have owned the property for 2 years before the transfer.
If the property is a replacement property it must have been held for 2 out of the last 5 years.

Question 29

Which assets cannot be used for the purpose of BPR?

Answer 29

Large cash investments e.g.

Large cash balances
Investments
Private use assets

Question 30

What are the additional requirements for lifetime gifts with regards to BPR?

Answer 30

When calculating the death IHT due on a lifetime gift, BPR is usually only available if the donee still owns the property as relevant property at the date of the donor death.

This means that for BPR to apply, the donee cannot just sell on the asset as soon as they receive the asset and still claim the relief. They must continue to use it in their business.

However if the proceeds used from the sale of the asset are reinvested into replacement property within 3 years of disposal then BPR will still apply.

Question 31

What is the acronym for remembering BPR?

Answer 31

ROSE

Relevant business property
Ownership of 2 years or 2 out of 5 years if replacement
Still own the asset at donors death
Excepted assets like large cash/ investments are not allowed.

Question 32

What is agricultural property relief?

Answer 32

When agricultural property is transferred it is given 100% IHT relief if certain conditions are met.

Agricultural property must be situated in EEA.
Agricultural property must have been owned and occupied for agricultural purposes for 2 years by donor, before the transfer.
If a tenant is using the property for agricultural services then it needs to be held for 7 years to qualify.

Shares in farming companies, also qualify for APR, but only where the shareholder has control.

Question 33

What is quick succession relief?

Answer 33

This is where one asset is being charged to IHT twice in a 5 year period.