Inheritance Tax Flashcards
What are the current rates of IHT?
- 0% - nil rate bands
- 20% - lifetime transfers
- 40% - death rate
What are the three potential trigger events for IHT?
- Potentially exempt transfers (PETs)
- Lifetime chargeable transfers (LCT)
- Death
What is the chargeable transfer value for IHT purposes for lifetime transfers?
Loss to the estate - captures gifts and transactions at undervalue as well as normal transfers
What is the chargeable transfer value for IHT purposes for transfers on death?
Value calculated by market value - what price would assets reasonably be expected to fetch on the open market
What is the current nil rate band?
£325,000
What is the current residential nil rate band?
£175,000
How does the transferrable nil rate band work?
Surviving spouse can claim an unused percentage of deceased’s spouse nil rate band
Can the TNRB be claimed by a spouse who outlives multiple spouses?
Yes - up to maximum cap of 100%
How is a claim made for the TNRB when multiple spouses?
Separate claims should be made for each TNRB.
Claims should even be made where TNRB is not at first need because of cap.
What three requirements are there to receive the residential nil rate band?
- deceased died on or after 6 April 2017
- death estate included a qualifying residential interest
- QRI was ‘closely inherited’ by a direct descendant
What happens if the deceased’s home is worth less than the RNRB?
Then nil rate band is capped at value of the deceased’s interest in the property
What happens to the RNRB if the estate is worth more than £2 million?
Reduction of £1 for every £2 above £2 million threshold
So no RNRB on net estates worth £2,350,000 or more
What is a qualifying residential interest for RNRB?
Dwelling-house which the deceased occupied as their residence at some point during their period of ownership.
Includes property in which deceased did not live in but intended to live in.
Not rental properties though where deceased never lived
What is closely inherited for RNRB?
Means beneficiary inherits:
- by gift of will
- operation of intestacy law
- operation of rules of survivorship
Not beneficiary with contingent interest
Who qualifies as a direct descendant for RNRB?
- children, grandchildren, great-grandchildren and other lineal descendants, adopted children, step-children, foster children
- spouse or civil partner of anyone above
- widow, widower or surviving civil partner of anyone included above provided they have not remarried at time of deceased’s death
Can RNRB be transferred between spouses?
Yes - same way as NRB
Cap of up to 100%
What special rule is there where decease has downsized?
Where deceased downsized to less valuable QRI, then additional QRI can be claimed for amount lost because former QRI is no longer owned?
What steps are there for calculating IHT due on lifetime transfers?
1) calculate cumulative total
2) identify value transferred
3) apply exemptions and reliefs
4) apply NRB and calculate tax
5) apply taper relief
6) give credit for tax paid in lifetime
How is the cumulative total calculated?
Need to add up value of all chargeable transfers that were made 7 years prior to that transfer
How do you identify the value transferred?
Need to calculate immediate decrease in value of the donor’s estate
What nil rate bands can lifetime transfer benefit from?
The nil rate band but never the RNRB
What happens if tax was paid during lifetime on transfer?
Factor that in any tax calculation. Only balance needs to be paid to HMRC
What must be done in regards to grossing up?
When a lifetime transfer is made and transferor pays the tax in addition to gift, the reduction of value of his estate includes amount of IHT paid as well as gift.
Amount of gift must be grossed up to include tax as that is part of the value transferred
What steps are there for calculating IHT on death?
1) Calculate cumulative total
2) identify assets included in the taxable estate
3) value the taxable estate
4) deduct debts/expenses
5) apply exemptions and reliefs
6) apply RNRB
7) apply basic NRB and calculate tax
How is the cumulative total calculated?
Add up value of all chargeable transfers made 7 years prior to death
What assets are included in taxable estate?
- all jointly owned property
- property subject to a reservation
- donations mortis causa
- statutory nominations
- must other property owned by deceased
- interest in possession trusts created before March 2006
- interest in possession trusts created after 22 March 2006 where trust is created on death for life tenant - life tenant trust capital value is included
What property is excluded for IHT calculations on death?
- remainder interest in life interest trust
- insurance policy written on trust for another (ie not deceased’s estate)
- discretionary pension schemes
How is value calculated for IHT calculations on death?
Market value of assets at date of death
What special rule exists for value of related property for IHT calculations on death?
If assets owned by spouses are more valuable when valued together, each party’s share is valued at their proportionate share of whole value
What special rule exists for value of joint property for IHT calculations on death?
For land co-owned as joint tenants or tenants in common, deceased’s share is reduced by 10-15% to reflect difficulty in selling a share of the property rather than the whole
Only applies where co-owners are not married
What debts can be deducted for reducing IHT purposes?
Deceased’s debts/liabilities due at date of death
Reasonable funeral expenses and cost of tombstone
Who pays tax on LCT when they are made?
Person whom the asset vest in is usually liable to pay IHT - normally trustees here
If trustees do not pay, then donor is liable
Who pays tax on lifetime transfers (failed PETs or LCTs) on death?
If tax due, then general rule is recipient is liable to pay IHT due
If recipient does not pay IHT within 12 moths then PRs liable to pay
What is the ‘free estate’?
Assets of the deceased’s that passes to PRs to be administered under the Will/intestacy rules
Who pays IHT on the free estate?
PRs liable to pay
Will be paid from residue unless contrary intention appears in Will
Can Will change who pays tax on lifetime transfers too?
Yes if specific intention is clearly stated in the Will - not enough to say all taxes should be paid from residue
Who pays tax for items that pass outside the succession estate?
General rule is that items bear the burden of the IHT attributable to them and liability falls to beneficiary of item
So
Joint property - surviving co-owner
statutory nominations - nominated beneficiary
DMCs - lifetime donee
Trust assets - trustees
Gift with reservation of benefit - lifetime donee
What exemptions and reliefs are only available for lifetime transfers?
- annual exemption
- family maintenance exemption
- small gifts exemption
- marriage exemption
- normal expenditure out of income exemption
- taper relief
What exemptions/reliefs are available on death only?
- woodlands relief
- quick succession relief
What exemptions/reliefs are available on both lifetime transfers and transfers on death?
- spouse exemption
- charity exemption
- business property relief
- agricultural property relief
- political party exemption
- exemptions for gifts for national purposes or to heritage maintenance funds
- exemption for gifts to Employee Benefit Trusts
- exemption for gifts to housing associations
What is the annual exemption?
- £3,000 annual exemption for tax free gifts each year
- applied chronologically
- two gifts on same day, then exemption applied pro rata
- once annual exemption for year used, can use any that was not used last year
What is the family maintenance exemption?
Following not treated as transfers for IHT purposes:
- a spouse (or former spouse if divorce settlement)
- minor child of either party to marriage for maintenance, education, training or if over 18, then in full time education or training
What is the small gifts allowance?
Small gifts of up to £250 per recipient can be made free of tax
Allowance cannot be combined with any other exemption
What is the marriage exemption?
- £5,000 if made by parent of one of the parties
- £2,500 if made by one party of the marriage to the other
-£2,500 if made by their remoter ancestor eg grandparent or great-grandparent
- £1,000 in any other case
- relief applies per donor
What is the normal expenditure out of income exemption?
Exempt is made
- from the donor’s income (not capital)
- as part of a normal/regular pattern of giving
- does not affect the donor’s standard of living
No upper limit to exemption
What is taper relief?
Reduces amount of IHT that would otherwise be payable if
- lifetime transfer was made 3-7 years prior to the transferor’s death and
- IHT is payable in respect of the lifetime transfer
What reductions are available in respect of taper relief?
- 0-3 years before death - 0%
- 3-4 years before death - 20%
- 4-5 years before death - 40%
- 5-6 years before death - 60%
- 6-7 years before death - 80%
What is the spouse exemption?
Gifts between spouses during life and following death are completely exempt
When will a spouse exemption apply and not apply in respect of interests in a trust?
- Will apply for value of assets transferred to a life interest trust for surviving spouse
- will not apply if they receive a remainder interest in a trust
What is the charity exemption?
All transfers to charities during life and death are exempt
Can a gift be conditional and still benefit from the charity exemption?
Yes - provided condition is satisfied within 12 months
Will a remainder interest in trust to charity qualify for exemption?
No - gift must be immediate and not in remainder
What charities will be covered by charities exemption?
Registered UK and EU charities
Must be for charitable purposes
What additional benefit can giving charity confer if made under Will in relation to IHT?
Can reduce tax rate from 40% to 36% if deceased leaves more than 10% of estate to charity
What is the gifts to political parties exemption?
Gifts are exempt provided:
- party had at least two MPs elected or
- party had at least one MP elected and at least 150,000 votes given to candidates representing that party
What is the gifts of land to housing associations exemption?
A gift of land is exempt from IHT if it is made to housing association or to registered social landlord
What is the gifts for national purposes exemption?
Gifts are exempt from IHT where they are made for designated ‘national purposes’
List of specified bodies eg National Gallery or British Museum
What is the gifts to heritage maintenance funds exemption?
Gifts to trusts which maintain historic buildings or land of scenic, scientific and historic interest
What is the gifts to employee benefit trusts exemption?
Strict and narrow exemption - do not need to know
What is business property relief?
Relief where taxpayer held certain qualifying business assets for qualifying period of time
What are qualifying business assets for business property relief?
- unquoted shares - shares in private companies - 100% relief
- quoted shares - shares listed on recognised stock exchange if taxpayer has great than 50% share - 50% relief
- business or interest in a business - taxpayer is sole trader or partnership interest - 100% relief
- assets owned by taxpayer but used for business purposes - 50% relief
What assets are specifically excluded from business relief?
Shares in company or business which is
- just for dealing in securities, stocks or shares, land or buildings
- making or holding investment
What are the qualifying periods of ownership for business relief to apply?
General rule - transferor must have owned the business assets continuously for at least two years immediately prior to ownership
Exceptions:
- if qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the taxpayer’s period of ownership is usually treated as continuous
- if a person inherits business assets following someone’s death, they are deemed to acquire them at date of death
- if a person inherits business assets following death of spouse, deemed to have owned property from time acquired by spouse
When is BPR available on lifetime transfers?
Only if qualifying property is transferred :
- is owned by the transferee and
- qualifies for BPR when the transferor dies
- no minimum ownership requirement of 2 years for transferee
What is agricultural property relief?
Reduces IHT payable on agricultural value (which may be different to market value) of qualifying assets when held for qualifying period of ownership
What is qualifying agricultural property for agricultural property relief?
- agricultural land and buildings - used for purposes connected with agricultural activity
- farmhouses and cottages - may qualify is of character appropriate to the associated agricultural land and have been occupied for purposes of agriculture
What is qualifying periods of ownership for agricultural property relief?
Qualifying property must have been:
- occupied for agricultural purposes by the transferor throughout the two years immediately before the transfer or
- owned by the transferor and occupied by them or another for agricultural purposes throughout seven years immediately before the transfer
Exceptions:
- Qualifying assets are sold and replaced with new qualifying assets within a certain period of time, the taxpayer’s period of ownership is usually treated as continuous
- if a person inherits qualifying assets following someone’s death, they are deemed to acquire assets on date of death
- if a person inherits qualifying assets following death of spouse, deemed to have owned property from time acquired by spouse
What rates of relief are available for agricultural property?
100% relief is available if the transferor was the owner occupier or the property was let on a tenancy beginning on or after 1st September 1995
50% relief for tenancies created before September 1995 where no specific concession applies
When is agricultural property relief available for lifetime transfers?
APR is only available for lifetime transfer if the qualifying property transferred
- is owned by the transferee and
- qualifies for APR when the transferor dies
- no minimum ownership requirement of 2 years for the transferee
What is the interaction between agricultural property relief and business property relief?
APR should be given in priority in BPR where both would apply
BPR should be used on assets that would not be covered by APR such as livestock
What is Woodlands relief?
On death relief only for gift of woodland.
Deferral of IHT on value of timber in woodland. Tax is deferred until timber is sold or given away.
How long must woodland be owned for to qualify for Woodlands relief?
If the deceased had purchased woodland - 5 years for before death
If deceased inherited the woodland - no qualifying period of ownership
What is quick succession relief?
Available where same assets would otherwise be subject to more than one IHT charge in quick succession
Applies where person dies and:
- their death estate includes assets received by way of gift or inheritance
- in the 5 years before death and
- those assets were subject to an IHT charge when transferred to the deceased
If qualifying for quick succession relief, what level of relief is available?
Tax previously paid is credited against the later tax due
What tapering relief is available for quick succession relief?
If death within one year of previous IHT charge - 100% relief up to amount of IHT paid previously
This then reduces each year with only 20% relief of amount of IHT paid previously at 4-5 years
