Inheritance Tax

Question 1

Annual Gift exemption

Answer 1

£3,000 each tax year
- can be carried forward for one tax year only
- cannot be combined with the small gifts exemption

Question 2

Small gifts exemption

Answer 2

• gifts of up to £250 can be made to any number of people in the same tax year
• must be an outright gift, not to a trust

Question 3

Normal expenditure out of income

Answer 3

• gifts must form part of normal expenditure
• gifts must be made out of income
• donor must be left with enough income to maintain their usual standard of living

Question 4

Gifts in consideration of marriage or civil partnership

Answer 4

• each parent can give £5,000
• each grandparent can give £2,500
• any other person can give £1,000

Question 5

Gifts for education and maintenance

Answer 5

• Lifetime transfers to a current or former spouse or civil partner or a dependent relative for their maintenance are not subject to IHT
• Payments for a child’s maintenance, education or training

Question 6

Exempt gifts made during lifetime or on death

Answer 6

• gifts between UK domiciled spouses and civil partners
• gifts to charities and political parties
• gifts for national benefit, such as to museums, universities, libraries or the National Trust.

Question 7

Gifts between spouses and civil partners

Answer 7

Gifts between spouses and civil partners are generally free of IHT provided that the recipient of the gift is UK domiciled or deemed domicile. Unlike the CGT spousal exemption, spouses do not need to be living together at the time of the transfer. The exemption still applies where the parties are separated but continue to be legally married or remain in a registered civil partnership.

Question 8

Gifts to a non-dom spouse

Answer 8

When a UK domiciled (or deemed domiciled) individual makes a gift to their non-UK domiciled spouse or civilpartner, the IHT spouse/civil partner exemption is limited.
Alternatively, the non-UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes. This election allows them to use an unlimited spouse exemption.

Question 9

Limited spouse exemption

Answer 9

The limited exemption is a cumulative amount equal to the standard IHT nil rate band. Prior to 5 April 2013 the limit was a cumulative total of £55,000.
This is a lifetime cumulative total which applies to both lifetime transfers and those made on death. Unlike PETs and CLTs which fallout of the cumulative total for IHT after seven years, gifts to a non-dom spouse will continue to use up the exemption whenever they were made.
Gifts which exceed the lifetime exemption will be PETs.

Question 10

Taper relief

Answer 10

Gifts which are chargeable lifetime transfers (CLTs) or potentially exempt transfers (PETs) may be subject to IHT if the donor dies within seven years of making the gift. Inheritance tax taper relief may reduce the amount of inheritance tax payable on lifetime gifts where:

• death occurs between 3 and 7 years from date of gift
• value of gift, when added to any other gifts in the previous 7 years, exceeds the nil rate band in the year of death

On death any PETs made within seven years of death will become chargeable transfers and any CLTs made during the same period will be reassessed for IHT. Each chargeable transfer will have its own seven year cumulation that will determine the amount of nil rate band available to it.

Question 11

Taper relief rates

Answer 11

0-3 years = 0%
3-4 years = 20%
4-5 years = 40%
5-6 years = 60%
6-7 years = 80%

Question 12

What is business property relief?

Answer 12

Business property relief (BPR) is available for transfers of business property during life or on death. The relief reduces the value for IHT of the business asset transferred. The business property must usually have been owned throughout the two years prior to the transfer. BPR is given at different rates depending on the asset.

Question 13

When is 100% business property relief available?

Answer 13

• a business or interest in a business (includes sole traders and partnerships)
• a holding of shares in an unquoted company (including Alternative Investment Market (AIM) companies)

Question 14

When is 50% business property relief available?

Answer 14

• controlling holding of shares in a quoted company (more than 50% of the voting rights)
• land or building, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership.

Question 15

For BPR to apply:

Answer 15

the assets must have been owned for the 2 years prior to the transfer

Question 16

Agricultural property relief

Answer 16

Agricultural property relief (APR) is available for transfers of relevant property made either during life or on death. The relief is usually given at a rate of 100% of the value of the asset (with no monetary limit) but may only be at 50% if the agricultural property was rented out before 1 September 1995.

Agricultural property is land or pasture that is used to grow crops or to rear animals intensively. It can also include stud farms, farm buildings, farm cottages and farmhouses. The agricultural property must be located in the UK, Channel Islands, Isle of Man or the European Economic Area, and it must be part of a working farm. The donor must have owned it for two years before the transfer or seven years if it is property that is let out to someone else for agricultural purposes.

Farm equipment and machinery, harvested crops and livestock do not qualify for APR.

APR may be lost if the donor dies within seven years of giving away agricultural property and the recipient no longer owns it or does not use it for agricultural purposes. The relief is also lost if a binding contract for sale exists at the time of transfer.

This is a complex area that requires specialist advice.

Question 17

Nil-rate band?

Answer 17

£325,000
- Transfer to spouse the unused % of Current NRB

Question 18

Residence Nil-Rate Band?

Answer 18

£175,000
- reduced if estate more than £2million
- in addition to nil-rate band (£325000)
- Transfer unused % to spouse of current RNRB

Question 19

What is Quick Succession Relief?

Answer 19

• A relief under S141 of the Inheritance Tax Act 1984
• to alleviate cashes where the same assets in an estate would otherwise be subject to IHT twice within a relatively short time period (5 years)
• essentially allows a % of the tax paid on the first death to be credited against the IHT paid on the second death.

Question 20

Quick Succession Relief - Percentages - %

Answer 20

• 100% if death occurs within 1 year of first death
• 80% if death occurs within 1 and 2 years
• 60% if death occurs between 2 and 3 years
• 40% if death occurs between 3 and 4 years
• 20% if death occurs between 4 and 5 years

Question 21

No Quick Succession Relief when:

Answer 21

• the earlier transfer was exempt from IHT
• the earlier transfer was chargeable but tax was not paid because it was below the threshold
• the earlier transfer was more than 5 years before the death