Inheritance Tax

Question 1

what 3 events may trigger an IHT payment?

i.e., what are the 3 types of chargeable transfers?

Answer 1

(1) Potentially Exempt Transfers

(2) Lifetime Chargeable Transfers

(3) Death

Question 2

What is a potentially exempt transfer (PET) and what is the tax treatment?

Answer 2

PET = lifetime transfers of value that are only chargeable with the death estate at 40% if the transferor dies within 7 years of making them (aka ‘failed PET’)

Tax treatment =
- transfer is not chargeable at the time it is made
- transfer becomes fully exempt if the transferor survives 7 years
- If transferor dies within 7 years of making it, the PET fails and becomes a chargeable transfer subject to IHT

Question 3

what is a lifetime chargeable transfer (LCT) and what is the tax treatment?

Answer 3

LCT = lifetime transfers of value made by a person into a trust

Tax treatment =
- LCTs are immediately chargeable at 20% (the NRB is factored into this - so chargeable at 20% above the NRB, and the NRB is reduced by any LCTs made)
- If the transferor survives 7 years, there is no more IHT
- if the transferor dies within 7 years, the LCT will be reassessed to tax at the death rate of 40%

Question 4

what is the tax treatment of death as a chargeable transfer?

Answer 4

when a person dies, there is a deemed transfer of their assets - and IHT is chargeable on this transfer of value

Tax treatment =
- IHT is payable on a person’s taxable estate at 40% of the value above the available NRB
- ALSO: IHT is payable on any failed PET or LCT made in the 7 years before death at 40%

Question 5

what is a chargeable transfer?

Answer 5

a chargeable transfer is a ‘transfer of value’ which is not an exempt transfer

a transfer of value is a disposition which results in an immediate decrease in the value of a person’s estate (gifts and transactions at an undervalue)

Question 6

how is the value of a chargeable transfer assessed?

lifetime transfers vs death estate

Answer 6

lifetime transfers = assessed by the loss in value to the donor minus any exemptions and reliefs that apply

death estate = assets are valued by reference to the market value on the date of death

Question 7

what is the cumulative total?

what is the effect of cumulation?

Answer 7

cumulative total = total chargeable value (deducting exemptions and reliefs) of all the chargeable transfers made in the 7 years before death

• SO: cumulative total for death= failed PETS + LCTs

effect of cumulation = reduces the NRB available

• SO: available NRB = 325,000 - cumulative total

Question 8

what is the nil rate band (NRB)?

Answer 8

£325,000 of chargeable transfers are at rate of 0% (no tax due)

(so, failed PETs, reassessed LCTs, and taxable death estate will be reduced by the NRB)

Question 9

what is the transferrable nil rate band (TNRB)?

Answer 9

TNRB = a person’s surviving spouse / CP can inherit the unused portion of their NRB (subject to a cap of £650,000)

TNRB is only available after the surviving spouse dies for the IHT payable by the surviving spouse

If D outlived multiple spouses, D can claim TNRB for all of them (subject to a cap of £650,000)

If X was entitled to claim TNRB from a deceased spouse Z, and X later marries Y but X then dies, Y can claim the TNRB that X was entitled to claim from Z (subject to a cap of £650,000)

Question 10

what is the residence nil rate band (RNRB)?

Answer 10

RNRB = an additional £175,000 is taxed at 0% if a ‘qualifying residential interest’ is ‘closely inherited’ by a ‘direct descendant’

Question 11

when is the value of the RNRB going to be less than £175,000? (3 cases)

Answer 11

• if the value of D’s interest in the property is less than £175,000, the RNRB is capped at the value of the property
• RNRB is reduced if the net value of the estate is worth £2m+ (tapered by £1 for every £2 above £2 million)
• No RNRB available for estates worth more than £2.5m (single RNRB) or £2.7m (if double RNRB applies)

Question 12

what is a ‘qualifying asset’ for purposes of RNRB?

Answer 12

interest or share in a dwelling house which the deceased occupied as their main residence or intended to live in in due course

does not include rental investment properties that D did not live in or properties that are let out

Question 13

what is the meaning of ‘closely inherited’ for the purposes of RNRB?

Answer 13

gifted under a will or inherited under the intestacy rules or through the operation of survivorship

BUT B must have had a vested not contingent interest in the dwelling house

Question 14

what is the meaning of ‘direct descendant’ for the purposes of RNRB?

Answer 14

(1) lineal descendants (children, grandchildren, etc)

(2) spouses / CPs of lineal descendants

(3) widows of lineal descendants who did not marry

Question 15

can a deceased’s unused RNRB be transferred to their spouse / CP upon the latter’s death?

Answer 15

yes - a deceased’s unused RNRB can be transferred to their surviving spouse/CP upon the surviving spouse/CP’s death – capped at 100% (£350,000)

• the surviving spouse must leave the QRI to a direct descendant
• QRI does not have to be the same QRI that the surviving spouse lived in with the predeceasing spouse
• the pre-deceasing spouse does not need to have had a QRI at all or need to have inherited one themselves

Question 16

what is the maximum combined NRB available for a deceased to theoretically claim?

Answer 16

£1 million

• £325,000 - NRB
• £325,000 - RNRB
• £175,000 - RNRB
• £175,000 - spousal RNRB

Question 17

is a GROB included in the taxable estate?

Answer 17

yes if made in 7y before death (but not succession estate)

Question 18

is a pension scheme lump sum payment included in the taxable estate?

Answer 18

• if discretionary = no
• if payment is payable by right = yes

Question 19

is a life policy payment written in trust for someone included in the taxable estate?

Answer 19

no

Question 20

if D was a life tenant, is the value of the trust fund included in D’s taxable estate?

Answer 20

yes only if the life interest trust was created in someone else’s will (but not succession estate)

Question 21

if D was a beneficiary under a discretionary trust, is D’s interest included in D’s taxable estate?

Answer 21

no

Question 22

if D jointly owned property, when is D’s share included in his taxable estate?

Answer 22

• joint tenants = D’s share included in taxable estate, but not in succession estate
• tenants in common = D’s share included in taxable and succession estate

Question 23

if D made a DMC, is this included in taxable estate?

Answer 23

yes (but not succession estate)

Question 24

if D made a statutory nomination, is this included in taxable estate?

Answer 24

yes (but not succession estate)

Question 25

what assets are included in the taxable estate? (6)

Answer 25

all property that D was beneficially entitled to at date of death is included in the taxable estate

including:
1. D’s share of all jointly owned property (JT and TiC)
2. gifts with reservation of benefit
3. donationes mortis causas
4. statutory nominations
5. interest in possession trusts (trust property where D was a life tenant of a trust created in someone else’s will)
6. pension lump sum payments payable by right (and not discretionary sums)

Question 26

what assets are excluded from the taxable estate? (3)

Answer 26

(1) if D had a remainder interest in a life interest trust and D died before the life tenant

(2) proceeds of an insurance policy written in trust for another person

(3) discretionary payments made under a discretionary pension scheme

Question 27

how are gifts with reservations of benefits treated for inheritance tax purposes?

Answer 27

• GROB = D gives an asset away during his life but reserves a benefit
• the value of the asset at date of death is included in the donor’s taxable estate
• a GROB can be avoided by ensuring the donor does not derive benefits or by paying market value for the time they do derive benefits

Question 28

how are donationes mortis causas treated for inheritance tax purposes?

Answer 28

• DMC = lifetime gift made conditional on death in contemplation of death of a specified cause and revocable before death
• the subject of the DMC still forms part of the taxable estate at the date of death value

Question 29

how are joint properties treated for inheritance tax purposes?

Answer 29

• property owned as tenants in common = D’s share passes into D’s succession and taxable estate
• property owned as joint tenants = excluded from succession estate (passes by survivorship) but D’s share is included in taxable estate (deemed severance of JT)

Question 30

when does trust property form part of the taxable estate if D was a beneficiary under a life interest trust?

Answer 30

forms part of taxable estate =
- D was a life tenant of a trust created in someone else’s will
- D was a remainderman of a life interest trust and D survived the life tenant

does not form part of taxable estate =
- D was a remainderman of a life interest trust and D did not survive the life tenant
- D was a life tenant of a trust created by someone during their lifetime (inter vivos - not by will)

Question 31

when do payments from a pension scheme form part vs not form part of the taxable estate?

Answer 31

form part of the taxable estate =
- pension lump sums payable as of right (no discretion involved)
- sums due that were payable before date of death if a regular amount was being paid

does not form part of the taxable estate =
- discretionary sums made by the pension fund trustees to a named beneficiary

Question 32

at what date are assets in the taxable estate valued? what are the 2 exceptions?

Answer 32

assets are valued at the market value at the date of death

exceptions:

(1) related property = where assets owned by spouses are valued more together than separately, D’s share will be their proportionate value of the combined pair

(2) joint property (JT or TiC) owned by D and a non-spouse = D’s share is reduced by 10%

Question 33

what are the exemptions and reliefs available for both lifetime and death transfers? (4)

Answer 33

(1) spouse exemption *

(2) charity exemption *

(3) business property relief *

(4) agricultural property relief *

Question 34

what exemptions and reliefs are only available for lifetime transfers? (6)

Answer 34

only available to reduce the taxable value of failed PETs and LCTs =

(1) annual exemption

(2) family maintenance exemption

(3) small gifts exemption

(4) marriage exemption

(5) normal expenditure out of income exemption

(6) taper relief

+

BPR

Agricultural property relief

Spousal exemption

Charity exemption

Question 35

what is the spousal exemption?

Answer 35

any gift between spouses / CPs during life or following death is completely exempt

(so any failed PET to a spouse or entitlement of a spouse to inherit from the will / intestacy rules is deducted from the value of the taxable estate)

Question 36

does spousal exemption apply if the spouse is a beneficiary under a life interest trust?

(life interest vs remainder interest)

Answer 36

exemption will apply to the total value of assets passing into the trust if the surviving spouse is a life tenant

exemption will not apply if the surviving spouse receives a remainder interest

Question 37

what is the charity exemption?

Answer 37

any gift to registered charities during life or following death is completely exempt from IHT provided the gift is used exclusively for charitable purposes

(note = if 10% of the net value of the estate is going to charity, the estate is taxed at 36% not 40% - less IHT may be payable overall)

Question 38

what is the business property relief? and what are the rates of relief? (4)

Answer 38

a person must have owned a qualifying business asset for the qualifying period of time for the relevant rate of relief to apply to reduce the value of the taxable estate

Question 39

what are qualifying business assets for BPR and what are their rates of relief? (4)

Answer 39

(1) unquoted shares in private companies (any amount) = 100% relief

(2) quoted shares in listed PLC with a controlling stake (50% or more) = 50% relief

(3) transferor is a sole trader or has a partnership interest = 100% relief

(4) assets transferred were owned by taxpayer but used for a business that the taxpayer controls = 50% relief

note: a business or shares in a business is not a QBA if the business mainly deals with investments, or dealing in securities, stocks, shares, land, or buildings (e.g., rental property, property management companies)

Question 40

what is the qualifying period of time for BPR to apply?

Answer 40

the QBA was owned immediately and continuously for at least 2 YEARS before the relevant transfer (i.e., before death or before making the PET)

exceptions:

• if QBA is sold and replaced with a new QBA, ownership of both is treated as continuous
• if the taxpayer inherits the QBA following someone’s death, they are deemed to have acquired it on the date of that person’s death
• if the taxpayer inherits the QBA following their spouse’s death, they are deemed to have owned it from the time it was originally acquired by their deceased spouse irrespective of duration of marriage

Question 41

what is required for BPR to apply to lifetime transfers?

Answer 41

• For lifetime transfers re-assessed at death (failed PETs and re-assessed LCT), BPR is only available if the transferee still owns the QBA when the transferor dies and for the portion of the QBA that is still owned by the transferee when the transferor dies
• (there is no minimum qualifying period of ownership of 2 years for the transferee)

Question 42

what is agricultural property relief?

Answer 42

the transferor owned a qualifying agricultural asset for the qualifying period of time

amount of relief = 100% of the agricultural value (different from market value)

qualifying agricultural property =
(1) agricultural land and buildings used for agricultural purposes
(2) farmhouses and cottages if they are occupied for agricultural purposes

qualifying period of time =
(1) asset must have been occupied by transferor for agricultural purposes for 2 years immediately before the transfer
(2) asset was owned by transferor but occupied by another person for agricultural purposes for 7 years immediately before the transfer

exceptions =
- if a qualifying asset is sold and replaced with new qualifying asset, ownership is treated as continuous
- if taxpayer inherits the asset after someone’s death, they are deemed to acquire it on date of death
- if taxpayer inherits asset after spouse’s death, they are deemed to have owned it from the date the spouse originally acquired it

where APR and BPR both apply, APR takes priority

Question 43

what is the annual exemption?

Answer 43

£3,000 is available free from IHT per tax year (April 6 - April 5)

the AE applies for the tax year that the gift is made

if the AE for the tax year the gift is made is already used, the unused AE from the previous tax year can also be used (but only the single previous tax year) - so £6,000 AE may be available

AE from the current tax year must be fully used before using AE from the previous tax year

AE is applied chronologically to transfers

AE is applied after all other exemptions / reliefs to ensure AE is available for the next tax year

Question 44

what is the family maintenance exemption?

Answer 44

the transfers to the following people will not be treated as transfers for IHT purposes (so no tax):

(1) to spouse
(2) to minor child of D or of D’s spouse for their maintenance, education, or training - or if adult then for full time education or training
(3) a dependant relative to make reasonable provision for their care

Question 45

what is the small gifts exemption?

Answer 45

small gifts up to £250 per recipient per tax year can be made free from tax

transferor can make multiple gifts of up to £250 to as many people as they like once a year

small gifts exemption cannot be available if combined with other exemptions - e.g., a gift of £3,250 cannot be made free of tax as donor can claim either AE or SGE not both

if the value of the gift exceeds £250 (e.g., £251) the whole exemption does not apply

Question 46

what is the marriage exemption? (4)

Answer 46

(1) £5,000 made by a parent (taxpayer) of a spouse

(2) £2,500 made by one party of the marriage (taxpayer) to the other

(3) £2,5000 made by a remote ancestor grandparent / great-grandparent (taxpayer)

(4) £1,000 in any other case

notes =
- ME and AE can both be claimed for the same gift
- ME applies per marriage not per party to the marriage
- ME applies per donor (e.g., dad husband can give £5k and mom can give £5k both free of tax)

Question 47

what is the normal expenditure out of income exemption?

Answer 47

a transfer is exempt if made:
(1) from the donor’s income (not capital)
(2) as part of a regular pattern of giving
(3) not affecting the donor’s standard of living

there is no upper limit

normal expenditure is more likely to apply for transfers made under legal obligations or there is a clear pattern of giving (e.g., monthly payments)

Question 48

what is taper relief?

Answer 48

the IHT paid on a failed PET or LCT may be reduced

conditions:
(1) lifetime transfer was made 3-7 years before transferor’s death
(2) IHT is actually payable for that specific transfer
(3) donor has died

Question 49

what are the rates of taper relief depending on the year the lifetime transfer was made?

Answer 49

0 - 3 years before death = no taper relief - 100% is payable

3 to 4 years before death = 80% is payable

4 to 5 years before death = 60% is payable

5 to 6 years before death = 40% is payable

6 to 7 years before death = 20% is payable

Question 50

what are the steps to calculate IHT on death? (8)

Answer 50

(1) calculate the cumulative total = sum of all LCTs and failed PETs in the 7 years before death minus any available lifetime exemptions and reliefs

(2) identify the assets included in the taxable estate

(3) identify the value of the assets included in the taxable estate (market value at date of death)

(4) deduct debts (D’s unpaid debts and funeral expenses)

(5) deduct available exemptions and reliefs

(6) apply the RNRB and spousal RNRB if available at 0% (deduct value)

(7) Apply the NRB and TNRB: subtract the cumulative total from the NRB/TNRB and apply 0%

(8) Apply the death date of 40% to the remaining sum

Question 51

what debts and expenses can be deducted from the taxable estate thus reducing IHT payment?

Answer 51

(1) Any debts D owed on the date they died – e.g., overdraft or bills – are deducted before IHT is calculated

(2) Funeral expenses and the cost of a tombstone are also deduced even if these costs are incurred after death

Other post-death expenses cannot be deducted from the value of the estate for IHT purposes - e.g., legal fees

Question 52

what are the steps to calculate IHT due:
(1) immediately for an LCT
(2) as a result of transferor dying within 7 years of making a PET or LCT

Answer 52

(1) calculate the cumulative total = sum of all LCTs and failed (only) PETs in the 7 years before the transfer in question minus any available lifetime exemptions and reliefs

(2) identify the value transferred = loss to donor at date of transfer

(3) apply exemptions and reliefs

(4) apply NRB minus the cumulative total at 0%

(5) Apply IHT rates:
- If lifetime LCT = apply lifetime rate of 20% to the balance
- if failed PET or re-assessed LCT = apply death rate if 40% o the balance

If donor died:

(6) apply taper relief (if available)

(7) give credit for IHT paid during lifetime for that transfer

note: IHT for lifetime transfers are calculated on an asset by asset basis and not like the succession estate where the total value is added together