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SQE1: Wills & the Administration of Estates > Inheritance Tax > Flashcards

Inheritance Tax Flashcards

1
Q

What are the 3 main occasions when IHT is chargeable?

A
  1. Death
  2. Potentially exempt transfers (lifetime gifts to individuals made in the 7 years preceding death)
  3. Lifetime chargeable transfers (lifetime gifts into trust or company)
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2
Q

How is IHT calculated?

A
  1. Identify the transfer of value
  2. Find the value transferred
  3. Apply the relevant exemptions & reliefs
  4. Calculate tax at the appropriate rate
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3
Q

1. Identify the transfer of value

What are the 2 possible transfers of value?

A

Deemed transfer of estate on death

or

Lifetime transfer which reduces the value of the transferor’s estate

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4
Q

2. Find the value transferred

What is the value of the estate on death?

A

The open market value of the assets of the estate, less any debts & funeral expenses

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5
Q

2. Find the value transferrred

What is the value transferred for a lifetime transfer?

A

The amount of reduction in value of the transferor’s estate

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6
Q

2. Find the value transferred

What are the related property rules?

A

The value of each asset is the appropriate portion of the value of the group (most applicable where property transferred between spouses)

Applies where something worth more in a group rather than on its own

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7
Q

3. Apply the relevant exemptions & reliefs

What are the exemptions & reliefs which apply to both death & lifetime transfers?

A
  1. Spouse exemption
  2. Charity exemption
  3. Business Property Relief
  4. Agricultural Property Relief
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8
Q

3. Apply the relevant exemptions & reliefs

What is the spouse / civil partner exemption?

A

Any property transferred between spouses (incl. by survivorship or intestacy) is exempt

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9
Q

3. Apply the relevant exemptions & reliefs

What is the charity exemption?

A

Any gifts made to a qualifying charity are exempt

Nb. Also applies to certain bodies providing public benefit (eg. galleries) & to political parties w/ at least 1 MP

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10
Q

3. Apply the relevant exemptions & reliefs

What is Business Property Relief?

A

Reduces value of transfer when business is trading in nature

  1. Must be relevant business property

a. Business or interest in a business = 100% relief

b. Unlisted shares = 100%

c. Listed shares where transferor had voting control (>50%) = 50%

d. Land, machinery, buildings, plant owned by transferor personally but used by business in which transferor partner or had voting control = 50%

  1. Transferor must have owned the relevant business property for at least 2 years
  2. PETs only: transferee must still own property at time of transferor’s death
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11
Q

3. Apply the relevant exemptions & reliefs

What are the 2 categories of ‘relevant business property’ which attract 100% Business Property Relief?

A

a. Business or interest in a business

b. Unlisted shares

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12
Q

3. Apply the relevant exemptions & reliefs

What are the 2 categories of ‘relevant business property’ which attract 50% BPR?

A

c. Listed shares where transferor had voting control

d. Land, buildings, machinery, plant owned by transferor personally but used by buisness in which transferor was partner or had voting control

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13
Q

3. Apply the relevant exemptions & reliefs

How long must the transferor have owned the relevant business property to qualify for BPR?

A

At least 2 years

(For PETs only: transferee must still own property at time of transferor’s death)

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14
Q

3. Apply the relevant exemptions & reliefs

What is Agricultural Property Relief?

A

Farms, agricultural land, farm buildings where individual owned land or rented on tenancy beginning on or after 1 Sept 1995 for the purposes of agriculture = 100% relief

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15
Q

3. Apply the relevant exemptions & reliefs

What are the exemptions & reliefs which apply to lifetime transfers only?

A

I. Annual exemption (£3,000)

II. Small gifts exemption (£250 or less) (PETs only)

III. Normal expenditure out of income

IV. Gifts given in consideration of marriage

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16
Q

3. Apply the relevant exemptions & reliefs

What is the annual exemption? (Lifetime transfers only)

A

First £3,000 transferred in each tax year

Can be carried forward for 1 year only

17
Q

3. Apply the relevant exemptions & reliefs

What is the small gifts exemption?

A

Lifetime gifts of £250 or less (applies to PETs only

18
Q

3. Apply the relevant exemptions & reliefs

What is normal expenditure out of income exception?

A

Normal expenditure payments made out of income so long as after such payments transferor left with sufficient income to maintain their usual standard of living (eg. payment of school fees)

19
Q

3. Apply the relevant exemptions & reliefs

What is the gifts given in consideration of marriage exemption?

A

Gifts given in consideration of marriage are exempt up to:

  1. £5,000 by parent of bride/groom
  2. £2,500 by remoter ancestor (eg. grandparent)
  3. £1,000 by any other
20
Q

4. Calculate tax at the appropriate rate

How is tax calculated at death?

A

Death estate valuation (minus) Residence NRB (minus) NRB (then) remainder taxed at 40%

21
Q

4. Calculate tax at the appropriate rate

What is the Residence Nil Rate Band?

A

0% on £175,000 where main residence passed on to direct descendants

  • Where estate is £2m+, RNRB is reduced by £1 for ever £2 over (175k - ((value - 2m)/2)
  • Any unused RNRB may be used by surviving spouse
22
Q

4. Calculate tax

What is the Nil Rate Band?

A

0% on first £325,000

  • Any unused NRB may be used by a surviving spouse
23
Q

4. Calculate tax

What is the tax rate for IHT on death?

A

40%

24
Q

4. Calculate tax

What will the tax rate of an estate on death be if there is a large charitable donation?

A

36%

Large charitable donation = 10% of baseline amount of defined component of person’s estate

25
Q

4. Calculate tax

How is tax calculated on PETs which have become chargeable?

A
  1. To establish how much NRB available, find cumulative total (any LCTs & PETs which have become chargeable made in the 7 years before PET being assessed)
  2. Any available NRB @ 0% - thereafter 40% → but if PET made 3+ years pre-death, tapering relief applies:
    3-4 yrs: 80%
    4-5 yrs: 60%
    5-6 yrs: 40%
    6-7 yrs: 20%
26
Q

4. Calculate tax

How is the cumulative total established?

A

Any LCTs & PETs which have become chargeable made in the 7 years before the LCT/PET being assessed

27
Q

4. Calculate tax

What is tapering relief?

A

If the lifetime transfer is made 3+ years before death, tapering relief reduces the % of tax payable:

3-4 yrs - 80%

4-5 yrs - 60%

5-6 yrs - 40%

6-7 yrs - 20%

28
Q

4. Calculate tax

How is IHT calculated on LCTs?

A

When transfer made
NRB (check if any already used up in 7 years preceding) then 20%

If transferor dies within 7 years
1. To determine how much NRB, establish cumulative total

  1. Any avail NRB then 40% thereafter → but if LCT made 3+ years before death, tapering relief applies
  2. Deduct any IHT paid at the time of the LCT
29
Q

4. Calculate tax

What is the tax rate when an LCT is made?

A

20%

(If transferor dies within 7 years, when IHT is recalculated will be taxed at 40% instead)

30
Q

When is IHT due?

A

By the end of the 6th month after the person died

31
Q

For which property can IHT be paid in 10 annual instalments?

A

a) Land & buildings

b) Most unquoted shares & securities

c) A business or interest in a business

32
Q

When is IHT due on an LCT at time of transfer?

A

If made between 6 April - 1 Oct, due 30 April in following year, otherwise 6 months after end of month in which LCT made

SQE1: Wills & the Administration of Estates (9 decks)

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