Inheritance tax

Question 1

When can inheritance tax arise?

Answer 1

Three occasions:
1. at the time that a transfer made during a person’s lifetime is made
2. on the same lifetime transfer if the transferor dies within 7 years of making the transfer
3. on the transferor’s estate after they have died

Question 2

What are the two kinds of lifetime transfers?

Answer 2

1. lifetime chargeable transfers
2. potentially exempt transfers

Question 3

What is a lifetime chargeable transfer?

Answer 3

It is made whilst the transferor is still alive, to any natural person or legal entity which is not an individual or trust in favour of a disabled person. It is a transfer for value, charged at 0% if it falls within the nil rate band and 20% if not. If the transferor dies within 7 years recharged at the death rate of 40% but subject to taper relief if transferor dies between 3 and 7 years

Question 4

What is a potentially exempt transfer?

Answer 4

It is made whilst the transferor is still alive and to an individual or trustees of a bare trust in favour of an individual or a trust in favour of a disabled person. It is a transfer for value and not charged at all if the transferor survives 7 years. Charged at the death rate, 40%, if does not survive but subject to taper relief between 3 and 7 years

Question 5

What is a transfer for value?

Answer 5

• gift of money
• if it is an item the rule is that the value transferred is the amount which the transferor’s estate is reduced by

Question 6

What happens if the transfer is not a gift?

Answer 6

Does not attract IHT - it must be a gift

Question 7

What are the transfers that do fall within the class of LCTs but are exempt from IHT?

Answer 7

• gift to spouse
• gift to charity
• gift to political party or national institution
• if the gift falls within the annual exemption (£3000 a year)
• presents, including wedding and engagement presents
• small gifts (£250)

Question 8

Who is responsible for paying the IHT?

Answer 8

The transferor

Question 9

When does a LCT attract IHT?

Answer 9

As soon as the gift is made. 0% if within the nil rate band, 20% if not.

Question 10

What are the steps for calculating IHT?

Answer 10

1. what is the value of transfer
2. deduct exemptions
3. deduct reliefs
4. calculate cumulative value of all transfers
5. calculate if anything left in NRB
6. apply IHT
7. apply taper relief if possible

Question 11

What is the annual exemption?

Answer 11

£3000 plus the previous year if not used - max £6000

Question 12

What are the two main tax reliefs on IHT?

Answer 12

• business property relief
• agricultural property relief

Question 13

What is business property relief?

Answer 13

BPR available at 100% if the transferor is selling a business or an interest in a business and the transferor:
- owned the business as a sole proprietor/been a partner for at least 2 years
- or if the transfer is of shares in a private company
- or it is 50% if the transferor had control of a public company and is transferring shares
- or if the transferor is transferring assets of a company

Question 14

What is agricultural property relief?

Answer 14

APR is available at 100% if the transferor occupied the transferred property for agricultural purposes for at least 2 years or rented by a farmer and owned by the transferor for 7 years

Question 15

What is taper relief?

Answer 15

If the transferor dies within 7 years of a transfer there is further tax to pay but if they dies within 3-7 years they only need to pay part of the amount.
6 years - 20%
5 years - 40%
4 years - 60%
3 years - 80%

Question 16

What is the nil rate band?

Answer 16

£325,000 charged at 0%

Question 17

What happens if a spouse dies and does not use all of their nil rate band?

Answer 17

The unused portion can be transferred to their widow

Question 18

What is the nil rate residence band?

Answer 18

£175,000 where the residence is being transferred to a direct descendent

Question 19

What happens if an estate is worth over £2 million?

Answer 19

The nil rate residence band is reduced by £1 for every £2 over the £2 million limit

Question 20

Do properties owned as joint tenancies, not with a spouse, form part of the death estate?

Answer 20

No but yes for IHT purposes

Question 21

If a life insurance policy is written into trust does it need to be considered for IHT?

Answer 21

No

Question 22

When do PRs have to pay capital gains tax on an estate?

Answer 22

If they sell property and the proceeds exceed the value on death

Question 23

When do beneficiaries have to pay capital gains tax?

Answer 23

If they sell an inherited asset at a higher value than what it was worth when inherited