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Ro3 Personal Taxation > Inheritance Tax > Flashcards

Inheritance Tax Flashcards

1
Q

What are the 3 inheritance tax reasons?

A

Transfers on death
Transfers within seven years of death
Chargeable transfers during life

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2
Q

What are the 4 rates of inheritance tax?

A

0% on £325,000 plus £175,000 for most property
40% above £325,000
36% where at least 10% of the estate is donated to charity on death.
20% on lifetime gifts above £325,000 over a seven year period

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3
Q

What is the loss to th donors estate principle?

A

The value of any gift made by any individual for the context of IHT is not the market value but how much the fall of the donors’ estate falls.

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4
Q

What is the principle of cumulation?

A

7 year look back

When making a chargeable transfer, it is necessary to look back 7 years for other chargeable transfers.

If these exceed the nil rate, band tax needs to be paid.

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5
Q

How is IHT handled for people deemed domiciled in the UK with overseas assets?

A

IHT due on worldwide assets

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6
Q

What are the options for mitigating inheritance tax?

A

Do nothing during life - make use of nil rate band and potentially the transferable nil rate band on death.
Give away assets
Give away but keep control
Insure against the liability

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7
Q

What is the rate for residence nil-rate band?

A

£175,000

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8
Q

How much could someone benefit from with both nil rate bands and from a couple?

A

1m

£325,000 x 2
£175,000 x 2

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9
Q

What conditions need to be met to qualify for residence nil-rate band IHT?

A

Must die on or after 6 April 2017 (can benefit from transferred before this)
Must own or part own a home that is part of the estate
Direct decendants to inherit property

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10
Q

When is the residential nil rate band withdrawn?

A

Progressively for estates over 2m

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11
Q

When must the 2nd partner of a marriage have died to qualify for IHT transferable nil rate band?

A

9th October 2007

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12
Q

What is included in the transferable nil rate band?

A

Any unused nil rate band from the first death of a married couple, including their residential nil rate band.

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13
Q

How is the transferable nil rate band worked out?

A

As a percentage of what was not used. Not the money figure left.

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14
Q

What is the maximum rate that can be transferred. I.e if someone is transferring from 2 dead spouses?

A

1 full nil-rate band.

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15
Q

What are the IHT exemptions for gifting?

A

£3000 cumulative for 1 consecutive year for 1 person.
£250 for any other person
Normal out of income exemption
Marriage gifts
Gifts for national benefit
Gifts to registered charities
Gifts to qualifying political parties

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16
Q

What is the normal out of income exemption?

A

Gifts made from surplus income that do not lower the standard of living and follow a regualr patern.

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17
Q

What are the marriage gifts?

A

£5000 parents
£2,500 grandparents/great grandparents
£1000 anyone else
Potentially exempt transfer if marriage doesn’t take place

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18
Q

What happens to gifts made between spouses when one is not UK domiciled?

A

Transfers are exempt up to £325,000 plus nil-rate band is also avialble so max £650,000.

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19
Q

What is a chargable lifetime transfer?

A

One where a person’s estate goes down, but no one else’s goes up.

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20
Q

What are the most common chargeable lifetime transfers?

A

Gifts into trust other than absolute or bare trusts.

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21
Q

Give a situation that would count as a chargeable lifetime transfer that is not into trust. And a similar situation that is a potentially chargeable lifetime transfer.

A

Grandparents paying their grandchildrens’ school fees straight to the school.

The same situation above but paid to the parents.

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22
Q

When would a lifetime payment be charged?

A

Immediately when it goes over the nil-rate band within the 7 year look back.

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23
Q

How are chargble lifetime transfers charged?

A

20% of the excess over the nil rate band.

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24
Q

When would a chargeable lifetime transfer payment be due?

A

6 months after the end of the month, the transfer was made.

Or if between 5th April and October 1st payment is due on 30th April.

25
Q

What happens if a person dies after seven years and what happens if they die within seven years of a CLT?

A

Tax can not be reclimed if they survive.

Extra tax may be due if they die.

26
Q

When a person dies within 7 years of a chargeable lifetime transfer, how is this charged

A

It is brought back into the estate.
It takes first call on the nil rate band
Any amount above attracts tax
Tax is handed in the normal way, but an allowance is then given for previous tax paid.
Taper relief may be applied.

27
Q

When is tapper relief applied to CLT

A

After 3 years from transfer.

28
Q

What would constitute a potentially exempt transfer?

A

Outright gifts and absolute trusts.

29
Q

How are failed potentially lifetime transfers charged?

A

Brought back into the estate.
Offset against the nil rate band with the oldest gift sitting at the bottom of the tax tower.

30
Q

Can the transferable and residential nil rate band be used on lifetime gifts?

A

No

31
Q

How is tapper relief applied?

A

To the tax on a gift, not the gift itself.

So if under nil rate band no tapper relief however er the gift still pushes up other tax.

32
Q

What are the key cumulation principles?

A

PETs made outside 7 years are exempt
CLTs made outside 7 years not chargeable on death but might affect NRB of other CLTs
CLTS and failed PETs within 7 years should have NRB reduced by CLTs made with 7 years of gift.

33
Q

How long back maximum might a person’s tax have to be looked at for IHT?

A

14year

(14 year trap)

34
Q

What is quick succession relief?

A

A reduction on tax for second death as a percentage of death on the first.

35
Q

What percentage is deduction is allowed on tax for succession relief for each year from death.

A

Up to 1 year 100%
1-2 years 80%
2-3 years 60%
3-4 years 40%
4-5 years 20%

36
Q

What is succession relief used for?

A

It’s only used on the amount the estate increased for the second dead from the first inheritance.

37
Q

What are the rules for spouses that simultaneously?

A

For IHT purposes, they die together.
For other reasons, the elder one dies first.

38
Q

What are the reliefs for IHT?

A

Business relief
Agricultural property relief
Woodland relief

39
Q

What are the rates on IHT for businesses?

A

100% for interest in unincorporated businesses or shares in AIM, EIS, and SEIS holdings. (No VCT)

50% for controlling interests in fully listed businesses or land, buildings, plant or machinery used in connection with the business.

40
Q

How long should an asset be owned for to qualify for business relief?

A

Usually 2 years

41
Q

When will no business relief be available?

A

Where there is a binding contract for sale at the point of death.

42
Q

What does agricultural property relief apply to?

A

Agircultural land, buildings, and crops situated in the EEA.

43
Q

What does agricultural property relief not apply to?

A

Livestock and equipment.

44
Q

What is the value of agricultural property based on?

A

The value of the land for agriculture only.

45
Q

What are the rates agricultural property relief set at?

A

100% for owner occupied farms and farm tenancies.

50% for interests in let farms. Though, where the lease is long-term (over 1 year) and started after 31/08/1995 goes back to 100%

46
Q

When will a farm be eligible for agricultural property relief?

A

Needs to be owned 2 years before death or owned for 7 years and occupied by someone else for the purposes of agriculture and can’t be subject to a contract for sale at death.

47
Q

What does woodland relief relate to?

A

Woodland in the EEA. Specifically the timber, not the land.
Does not apply on lifetime gifts - only on death.

48
Q

What does woodland relief do?

A

Refers tax until the timber is sold.

49
Q

What would be better business relief or woodland relief?

A

Business relief as woodland is only a deferral.

50
Q

What happens to gifts with reservation of benefit?

A

Considered still part of the donors’ estate and taxed as such.

This includes discretionary trusts that may have included a charge during life already.

51
Q

What is the pre-owned asset tax? (POAT)

A

Annual tax on the benefit someone obtains for using the asset they once used.

52
Q

How is POAT taxed?

A

Land is taxed on the rental amount.
Other assets are taxed by the capital value multiplied by the government’s standard interest value then taxed through income.

53
Q

How much tax must be accused before a charge is made for a a POAT?

A

£5000 but above will accure the highest marginal rate of income.

54
Q

How can someone avoid POAT?

A

By electing it to come back into their estate as a gift with reservation. This is done with the IHT 500 form.

55
Q

What happens with grossing up?

A

The HMRC charges tax on the tax. Due to the fall in the value of the settlers’ estate when electing to pay the tax on a chargeable lifetime transfer.

The simple calculation for this is to use 25% tax rather than 20%

56
Q

What ways should IHT be insured?

A

Whole of life or joint life second death for a couple. Combined with a trust to pre-fund the liability.

57
Q

How is the best way to insure PETS and CLTs?

A

Insure with 7 year term insurance at 40% or 36% if charity.

58
Q

If a PET is above the nil rate band, what would be the best way to insure it?

A

A gift inter vivo to cover the gift for taper relief.

59
Q

How do you calculate IHT

A

Calculate the value of the estate
Establish the value of avialble NRB
Identify PETs/CLTs in the last 7 years
Reduce the value of PETs/CLTs by exemptions
Calculate the total estate
Consider the rate of tax

Ro3 Personal Taxation (14 decks)

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