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Taxation FA22 > Inheritance tax > Flashcards

Inheritance tax Flashcards

1
Q

Inheritance tax is charged on:

A
  • a transfer of value
  • of chargeable property
  • by a chargeable person
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2
Q

A charge to inheritance tax arises:

A
  • on the death of an individual
  • on lifetime gits to individuals when the donor dies within seven years of the date of a gift
  • on lifetime gifts into trusts which are taxed at the date of the gift
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3
Q

Who is the donor?

A
  • is the person who makes the transfer of the asset, and the recipient is known as the donee
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4
Q

What is a transfer of value?

A
  • a gift of any asset which results in a reduction in the value of the donor’s estate
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5
Q

What is used to calculate the transfer of value for Inheritance tax purposes?

A
  • the loss to donor principle ( also referred to as the diminution in value concept)
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6
Q

What is the loss to the donor?

A
  • is the difference between the value of the donor’s estate before and after the gift, and is the starting point for lifetime Inheritance tax calculation
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7
Q

Lifetime inheritance tax calculation

A

Value of estate before gift x
Less: Value of estate after gift (x)
= Diminution in value or transfer of value x

  • usually the open market value of the asset gifted
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8
Q

The main charge to IHT arises on the death of an individual as liability arises on the following:

A
  • the value of all of the net assets in the individual’s estate at the date of death
  • any lifetime gifts made in the seven years before death, provided they are not exempt transfers
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9
Q

Three categories of lifetime gifts that can be made by an individual and they are treated for IHT purposes as follows:

A

Exempt
- no IHT
Potentially Exempt Transfers (PETs)
- become chargeable if the donor dies within 7 years of date of gift
Chargeable Lifetime Transfers ( CLTs)
- taxed immediately and also on death

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10
Q

Exempt transfers definition:

A
  • a gift or transfer that is specifically deemed to be exempt from IHT
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11
Q

Potentially Exempt Transfers (PETs) definition:

A
  • a gift by an individual to another individual
  • if donor lives seven years gift becomes exempt
  • if donor dies within seven years then the PET becomes chargeable on death for the first time
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12
Q

Chargeable lifetime transfers (CLTs) definition:

A

= residual category
- the gift is not exempt nor PET
- IHT calculated using the lifetime rates of tax
- if donor lives seven years then no further IHT payable
- if donor dies within seven years possibly extra IHT, calculated using the death rates of tax

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13
Q

What is a trust?

A
  • is an arrangement where property (known as the trust assets or settled property) is transferred by a person (known as the settlor) to the trustees, to be held for the benefit of one or more specified persons (known as the beneficiaries) on terms specified in the trust deed
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14
Q

Example of trust

A

Where parents with to give assets to their children, but not until they are adults. The parents therefore put the assets into a trust with the children as beneficiaries, and the assets are controlled by the trustees until the children reach a specified age

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15
Q

Potentially exempt transfers PETs where have derived their name from?

A
  • from the fact that if the donor lives for seven years after making the gift, then the transfer is exempt
  • transfer on death can never be PETs
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16
Q

Exempt transfers and reliefs available against lifetime gifts only:

A
  • small gifts exempt
  • marriage exemption
  • normal expenditure out of income
  • annual exemption
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17
Q

Exempt transfers and relief available against lifetime gifts and death estate:

A
  • inter-spouse exemption (which also applies to registered partners)
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18
Q

Small gifts exemption. Lifetime gifts are exempt if they are:

A
  • an outright gift to an individual of no more than £250
  • per recipient
  • per tax year
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19
Q

Marriage exemption to the maximum limits:

A
  • £5,000 by a parent
  • £2,500 by a grandparent or remoter ancestor
  • £2,500 by a party to the marriage or civil partnership (e.g. from the groom to the bride)
  • £1,000 by anyone else
  • is conditional on the marriage taking place
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20
Q

The lifetime transfer is exempt if it can be shown that the gift:

A
  • is made as part of a person’s normal expenditure out of their income
  • does not affect the donor’s standard of living
    Example: payment of school fees for grandchildren
21
Q

The annual exemption AE is an exemption available against lifetime transfers and operates as follows:

A
  • exempts the first £3,000 of lifetime transfers in any one tax year
  • is applied chronologically to the first gift in the tax year and the second gift and so on
  • must be applied to the fist gift each year, even if the fist gift is a PET and never becomes chargeable
  • the maximum AE in any one year is therefore £6,000
  • if other exemptions are available, they are given before the AE
22
Q

Any unused AE:

A
  • may be carried forward to the next year
  • however, it can be carried forward for one year only
  • can only be used after the current year’s AE
23
Q

Transfers between spouses, or between partners in a registered civil partnership, are exempt:

A
  • regardless of the value of the transfer
  • whether made during the donor’s lifetime or upon the donor’s death
24
Q

Calculate the chargeable amount of each CLT and PET:

A

Value of estate before transfer x
Less: Value of estate after transfer (x)
= Transfer of the value x
Less:
Wholly exempt transfers (spouse/partners) (x)
Specific lifetime exemptions:
- Marriage exemption (x)
- annual exemption (x)
= Chargeable amount x

25
Q

The procedure to calculate the lifetime IHT on a CLT

A

1 Calculate the chargeable amount of each CLT and PET
2 For CLT, calculate the amount of nil rate band available after allowing for any gross chargeable transfers in the previous seven years
3 Calculate the tax on the excess at either 20% or 25% depending on who has agreed to pay the tax; the donor or the donee
4 Calculate the gross chargeable amount of the gift to carry forward for future computations
5 If required, state the due date of payment of IHT

26
Q

What is the nil rate band for this year?

A

£325,000

27
Q

What if donees pays the tax?

A
  • the gift is referred to as a gross gift
  • the appropriate rate of tax is 20%
28
Q

What if donor pays the tax?

A
  • the gift is referred to as a net gift
  • as a result of the gift, the donor’s estate is reduced by:
    # the value of the gift
    # the associated tax payable on the gift
  • accordingly the amount of the gift needs to be ‘grossed up’ to include the tax that the donor has to pay
  • the appropriate rate of tax is therefore 25% (20/80)
29
Q

The date of payment of lifetime IHT depends on the date of the gift:

A

Date of CLT: 6 April to 30 September
Due date of payment: 30 April in the following year
Date of CLT: 1 October to 5 April
Due date of payment: Six months after the end of the month of the CLT

30
Q

The seven year cumulation period for NRB

A

For lifetime calculations, to calculate the NRB available at any point in time, it is necessary to take account of the total of the gross amounts of all other CLTs made within the previous seven years

31
Q

On the death of an individual, an IHT charge could arise in relation to lifetime gifts within seven years of death as follows:

A
  • PETs become chargeable for the first time
  • Additional tax may be due on a CLT
32
Q

The IHT payable on lifetime gifts as a result of death is always paid by the recipient of the gift:

A

CLT - paid by trustees of the trust
PET - paid by donee

33
Q

The death tax is calculated on each gift separately, in chronological order, as follows:

A
  1. Identify all gifts within seven years of death
  2. Calculate the gross chargeable amount of each gift, and also any lifetime tax paid
  3. Calculate the amount of NRB available for each lifetime gift that is taxed on death, after deducting all gross chargeable transfers in the seven years before that lifetime gift:
    # use the NRB for the tax year of death(rather than the NRB for the tax year of the gift)
    # include PETs that have become chargeable due to the donor’s death, but not PET s that are now exempt (gifted more than seven years pre-death)
  4. Calculate the death tax at 40% on each GCT less the available NRB
  5. Calculate and deduct any taper relief available per GCT
  6. For CLTs, deduct any lifetime IHT paid
  7. If required, state who will pay the tax and due date of payment
34
Q

Where IHT is chargeable on any lifetime transfer due to death within seven years, the amount of IHT payable on death is reduced by taper relief:

A
  • where more than 3 years have elapsed since the date of the gift
  • by a percentage reduction according to the length of time between
    # the date of the gift and
    # the date of the donor’s death
    Relief applies to both CLT and PETs
35
Q

When is the normal due date of payment of IHT on death?

A
  • IHT as a result of death is due six months after the end of the moth of death
36
Q

What includes the death estate?

A
  • includes all assets held by the individual at the date of death
  • the value of assets brought into an individual’s estate computation is normally the open market value of the asset at the date of death (known as the probate value)
37
Q

Pro forma death estate computation:

A

Land and buildings x
Less: Mortgage (x)
x
Business owned by sole trader/partnership x
Stocks and shares (including ISA) x
Government securities x
Insurance policy proceeds, life insur. x
Cars x
Personal chattels x
Debts due to the deceased x
Cash at bank and on deposit including ISA x
x
Less:
Debts due by the deceased (x)
Outstanding taxes (x)
Funeral expenses (x)
(x)
Estate value x
Less: Exempt legacies to spouse or civil partner (x)
Gross chargeable estate x

38
Q

The procedure to calculate the IHT on the death estate

A
  1. Deal with the IHT on all lifetime gifts made within seven years of the date of death first before looking at the death estate computation
  2. Calculate the gross chargeable estate value
  3. Calculate the available residence nil rate band
  4. Calculate the amount of NRB available after deducting GCT s in the previous years
  5. Calculate the tax on the excess at 40%
  6. If required, state who will pay the tax and the due date of payment.
39
Q

When applies the residence nil rate band?

A
  • applies on a death estate where a dwelling house, which has been the deceased person’s residence, is inherited by one or more direct descendants
  • calculating the tax on the death estate
  • the date of the dearth is on or after 6 April 2017
40
Q

Inheritance tax as a result of a death is due on the earlier of:

A
  • six months after the end of the month of death or
  • on delivery of the account of the estate assets to HMRC
41
Q

The available residence nil rate band is lower of:

A
  • £175,000
  • the value of the main residence within the death estate
    The value of the main residence is after deducting any repayment or interest only mortgage secured on the property
42
Q

Who is executors regarding inheritance tax on the death estate?

A
  • personal representatives
43
Q

Who is residuary legatee regarding inheritance tax one the death estate?

A
  • person who inherits the residue of the assets after the specific legacies have been paid
44
Q

Payment of inheritance tax on the death estate:

A

Spouse - exempt
Specific UK assets are paid by executors and suffered by residuary legatee
Residue of estate is paid by executors and suffered by residuary legatee

45
Q

The surviving spouse or civil partner will have the benefit of:

A
  • that person’s own NRB
  • any unused proportion of the spouse’s civil partner’s NRB
    The executors of the surviving spouse or civil partner must claim the transferred NRB on the IHT return submitted for the second death. The claim on this return must be submitted by later of:
    # 2 years after the second death, or
    # 3 months after the executors starting to act
46
Q

The transfer of the RNRB operates in a very similar way to the transfer of the NRB:

A
  • the amount of the RNRB that can be claimed by the surviving spouse/civil partner is based on the proportion that was unused by the first spouse
  • the unused proportion is applied to the RNRB amount available on the second spouse/civil partner’s death
  • the executors must claim the transferred RNRB within the same time limits as for the transferred NRB
47
Q

Inheritance tax is payable as follows:

A

CLTs between 6April and 30September
due date: 30 April in the following year
CLTs between 1October and 5April
due date: 6months after the end of the moth in which the transfer is made
PETs chargeable as a result of death
due date: 6months after the end of the month of death
Additional tax due on CLTs within seven years before the death
due date: 6 months after the end of the month of death
Estate at death
due date: on delivery of the estate accounts to HMRC. Interest runs from 6 months after the end of the month of death

48
Q

The overall objectives of all IHT tax planning measures are:

A
  • to minimise the amount of tax payable
  • to maximise the inheritance of the next generation

Taxation FA22 (25 decks)

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