Inheritance Tax Flashcards
Inheritance Tax is charged at the following rates
- 0% on estate under the nil rate band (NRB) of £325,000
- 20% on chargeable lifetime transfers (gifts into certain trusts)
- 40% on estate over NRB (36% where 10% of net estate left to charity)
IHT is payable on the worldwide assets of those domiciled and deemed domicile (15/20 tax years resident in UK) and on the UK assets of non doms.
What is the Loss to Estate Principle for IHT?
Loss to the Estate Principle is used to calculate the value of an item for IHT
Losses to estate can include not collecting debt or making gifts
Repayment of loans / commercial at arms length not deemed a loss
If undervalued (not at arms length) will be deemed loss rather than price paid
What is a Legal Personal Representative?
Person responsible for payment of tax of the estate within 6 months after the end of the month in which death occurs.
What is the Grant of Representation?
Legal document confirming person can deal with deceased’s estate.
Can access deceased’s bank account, sell property, and distribute estate.
Issued by Probate Registry
How does Capital Gains Tax work AFTER death?
CGT Tax due at higher rates on disposals by Personal Representatives on any post death
Annual Exemption available for year of death and following 2 tax years
Able to claim for capital losses made in year of death up to date of death.
How does Income Tax work AFTER death?
Income tax is owed on any income generated up to date of death. Usual allowances allowed.
Personal Allowance available in full even if died on day 2 of tax year.
Income received post death all charged at basic rate - No Allowances applicable.
Examples of Transfers exempt from IHT during lifetime
(Quick Fire x4)
Annual Exemption (£3,000 x 1)
Small gifts (£250 x unique infinity)
Marriage / Civil partnership gifts.
Normal expenditure out of income.
How is gifting out of income treated for IHT?
Exempt for IHT if can be shown
Does not affect lifestyle of donor
Comes out of income not capital (or Bonds)
Is a regular gift (annual allowed)
What are the Marriage / Civil Partnership EVENT Gifts for IHT?
£5,000 to Children
£2,500 to grandchildren, between spouses
£1,000 to anyone else
(See Tax Tables)
What is Small Gifts for IHT?
Small gifts - £250 per person. Unlimited while unique individuals.
What is the Annual Exemption for IHT?
Annual Exemption - £3,000 per tax year.
Can be carried forward 1 year.
What is the Spousal Exemption in IHT?
Any gifts between spouses is exempt from IHT if domiciled in UK.
Limited to NRB if non-UK DOM.
Examples of expenditure / gifts exempt from IHT?
(Non-family led x5)
Education and Maintenance for Children
UK Charities Gifts
UK Political Party Gifts
Gifts for National Benefit
Death as a result of active service (Entire estate)
What is a “Disclaimer” in relation to IHT?
Passes back inheritance to the Estate with no control on where the funds go
Must be completed within 2 years of death + Must be signed by “disclaimer”
What is a “Deed of Variation”?
Allows redirecting of estate assets to another.
Must be done within 2 years & signed by all involved
Effectively the will or intestacy is re-written
How is joint property treated for couples in the case of death?
Tenants in common - deceased share passes according to will / intestacy
Joint tenants - survivor inherits
What happens if couple die simultaneously?
General law presumes eldest died first
What is the Residence Nil Rate Band (RNRB)
£175,000 additional IHT Band
Can be inherited up to 100%
Estates over £2m lose £1 for each £2 over £2m
Introduced 6 April 2017
Non-Doms do not received
What is Taper Relief % reductions?
Taper relief reduces amount of tax payable, not value of the transfer. (See the Tax Tables!)
When PETs become retrospectively chargeable, they use up the NRB - this increases the tax due on the estate
Is taper relief applied before or after tax paid by trustees?
Before e.g. it is applied to the gross owed inheritance tax
What are Potentially Exempt Transfers (PETs)?
- Lifetime transfer by an individual to:
- another individual
- bare trust
- trust for vulnerable person
- No tax at date of gift
- No requirement to report to HMRC
- If donor survives 7 years, gift becomes fully exempt
- Death within 7 years becomes chargeable
- PET valued at date of gift
What are Chargeable Lifetime Transfers (CLTs)?
- Lifetime transfers made to trusts (other than bare or disabled)
- 20% Chargeable to IHT if value above NRB - Charged to trustee (Cumulative 7yr RNB usage)
- 25% Chargeable to IHT if value above NRB and paid by settlor
- Death within 7 years? Comes back into estate.
- Entire value charged for IHT LESS Taper Relief + previously paid Tax
- No refund given if tax overpaid
Life assurance to protect recipient of PET
How would this work?
- 7 year decreasing term assurance to protect recipient of PET / CLT (gift inter vivos / multi-benefit policy to achieve this).
- 7 year LTA to protect estate from loss of NRB while PET/CLT active, written under trust for beneficiaries of estate and LPRs as trustees.
- Any outstanding liability on estate Single Life / Joint Life 2nd Death policy written under trust for amount of liability.
- Premiums payable on such life policies can use annual exempt amount/ normal expenditure option.
CLT Example of taxation:
£375,000 gift to discretionary trust. No previous gifts. Death 3.5 years later
- Tax at date of gift
- £375,000 - £6,000 (2 x annual exemptions, current and previous tax year) = £369,000.
- £369,000 - £325,000 = £44,000
- £44,000 at lifetime rate of 20% = £8,800.
- Tax on death
- £369,000 - £325,000 = £44,000
- £44,000 at death rate of 40% = £17,600
- Death 3.5 years after gift so only 80% IHT payable. £17,600 @ 80% = £14,080.
- Deduct tax paid during lifetime £14,080 - £8,800 = £5,280.
- Lifetime tax is normally due 6 months after the end of the month in which the CLT is made.
What attracts 100% Business Relief (IHT)?
A trading business or interest in one / Or AIM / EIS investments.
Must have been owned for 2 years
Is still “included” in the estate at 0%
What attracts 50% Business Relief (IHT)?
A Quoted Company or interest in one / Or Land, buildings, machinery used for for work
Must have been owned for 2 years
Is still “included” in the estate at 0%
What is Agricultural Property Relief?
- Available to Agricultural Land / Farmhouses and other farm buildings / Growing Crops
- 100% AR for owner-occupied farms and farm tenancies.
- 50% AR for landlord with interests in let farmland which extends to 100% BR if tenancy more than 12 months.
- Must have been owned for agricultural purposes for 2 years, or 7 years if let out during the period.
- No binding contract of sale as per BR.
- If AR and BR apply - AR given first.
What is Post Mortem Relief?
- If shares sold within 12 months of death; or
- Property sold within 4 years of death.
- Is sold for less than the valuation at date of death, IHT is calculated on the disposal proceeds not at DOD.
- This applies to all shares/ property sold not just those sold at a loss.
What is Woodland Relief (IHT)?
- Only applicable to timber (land would probably qualify for AR).
- Only for transfers on death and only defers IHT until disposal of timber although the nature of the business would mean the whole woodland would get BR anyway.
What is Quick Succession Relief (QSR)?
(What’s the formula)
QSR - IHT Relief if you die within 5 years (avoids double IHT Tax)
(IHT Paid / Entire Estate) * Gift Received - [All based on 1st death details]
What is the 14 Year Rule?
A failed PET or CLT in the 7 years before death will mean you need to check the previous 14 years to see if the NRB had already been utilised.
In essence the 14 year rules catches schemes in which the RNB would have been used by a previous gift.
(View image for clearer guidance)
What three things should an administrator / executor consider when valuing an estate on death?
(1) Value of the estate including the share of those jointly held and life policy proceeds not in trust.
(2) Reviewing transfers made before death
(3) Deducting debts, outstanding taxes and funeral expenses
