INHERITANCE TAX

Question 1

3

Effect of Domicile

Answer 1

1. Individuals who are domiciled in the UK are liable to IHT on transfers of all worldwide assets, wherever the assets are situated.
2. How-ever, individuals who are domiciled outside the UK are liable to IHT on transfers of their UK assets only.
3. If a non-domiciled person owns assets which are situated outside the UK, those assets are ‘excluded property’. Trans-fers of excluded property are ignored for IHT purposes. The concept of domicile is thus extremely important for IHT.

Question 1

Chargeable Transfers

Answer 1

chargeable transfers include gifts made on death and cer-tain lifetime gifts. IHT can be imposed on the transfer of any
asset—money, stock, cars, residences, and so on.

Question 2

Loss to Donor

Answer 2

Whether a transfer is a chargeable transfer/gift is determined in part by whether the donor’s estate was** reduced in value** by the transfer.
we have to calculate the loss to the donor’s estate rather than the gain to the recipient of the gift.

Question 3

Transfers Ignored for IHT

Answer 3

1. Transfers for equivalent value, of course, are not treated as
   gifts.
2. What if you sell an item for less than its marketvalue—that is, you make a bad bargain? As a general principle,if an individual makes a transfer without any** ‘gratuitous intent’,**that transfer is disregarded for IHT purposes.
3. Therefore, if anindividual enters a transaction with an unconnected person,but as a result of the transaction the value of the individual’s
   estate falls, they are not treated as having made a gift for IHTpurposes.
4. A donor must deliberately intend to make a gift tomake a chargeable transfer of value (gift) for IHT purposes.

Question 4

Expenditures for Family Maintenance Not
Chargeable Transfers

Answer 4

Expenditure on the maintenance of an individual’s family is not treated as a gift for IHT, even though the donor’s estate will be reduced because of the transfer.

Question 5

Valuing Transfers

Answer 5

1. loss to the donor pricniple
   2.Related Property

Question 6

valuing transfers
related property

Answer 6

There are special rules for valuing property if there is other property that is ‘related’ to it. Broadly speaking, related prop-erty is similar property owned by a spouse or civil partner.
If an asset has a higher value taking into account property owned by a spouse or partner than it would have on a ‘stand alone’ basis, under the related property rules, the asset is
valued at that higher amount.

EXAMPLE
In the previous example, if Frank’s wife owned 3,000 shares and her share ownership plus Frank’s made Frank’s 6,000 shares worth £72,000 (£12/share) instead of £48,000, we would use that number as a starting point under the related property rules. However, we also would consider the impact of Frank’s wife’s shares on the value of the 4,000 shares Frank retained after making the gift. If Frank’s 4,000 shares would be worth £8 each when considered with his wife’s re-
lated shares, his 4,000 shares would be worth £32,000 and the gift would be valued at £40,000 (£72,000 - £32,000).

Question 7

3

LIFETIME TRANSFERS

Answer 7

1. To prevent the diminution of an estate ‘shortly’ before death, some lifetime transfers are chargeable, either automatically (a ‘chargeable transfer’) or potentially.
2. A potentially chargeable transfer is actually known by its fip-side—a potentially exempt transfer (‘PET’).
3. PETs are lifetime gifts which are** neither exempt nor (automatically) chargeable** transfers; whether PETs are ex-empt from tax depends on a future event: whether the donor dies within seven years of making the gift.

Question 8

6

Exempt Transfers/Gifts

Answer 8

1. Gifts to Spouse
2. Gifts of UK Charities
3. small gifts
4. Gifts on Marriage
5. normal expenditure out of income
6. annual exemption
   7.

Question 9

2

Gifts to Spouse

Answer 9

1. The transfer of any asset by an individual to his or her spouse or civil partner, either during lifetime or on death, is complete-ly exempt from IHT.
2. The only exception is if the donor spouse is UK domiciled and the recipient spouse is not domiciled in the UK. In this instance, only the frst
   £325,000 of the transfer is exempt from IHT.

Question 10

Gifts to UK Charities

Answer 10

Gifts to UK and European Economic Area charities or charita-ble trusts are exempt from IHT, without any monetary limit.

Question 11

Small Gifts

Answer 11

1. Lifetime gifts of up to £250 to any donee in a tax year are exempt from IHT. This is an ‘all or nothing’ exemption. For ex-ample, if an individual makes a birthday gift of £300 to their grandchild, the whole of the £300 is treated as a transfer of value, and not just the excess above £250.
2. There is no limit to the number of donees. Therefore, if a grandparent has 10 grandchildren, they could give each grandchild a gift of up to £250 without making a transfer of value for IHT purposes.

Question 12

Gifts on Marriage

Answer 12

*A parent—up to £5,000;
*A grandparent—up to £2,500;
*Bride to the groom or vice versa (before the wedding)—£2,500;
*All others—£1,000.

1. These exemptions apply per marriage/civil partnership.
   Therefore, if a father gives £5,000 to his daughter as a wed-ding gift, he could not give a further £1,000 to his son-in-law and claim exemptions for both gifts.
2. However, these are not ‘all or nothing’ exemptions, so only excess transfers above these limits are treated as transfers of value for IHT purposes.

Question 13

3

Normal Expenditure Out of Income

Answer 13

1. A lifetime transfer is exempt if it constitutes ‘normal expendi-ture out of income’. ‘Normal’ in this case means habitual or regular—that is, a gift that happens year after year.
2. A gift will be treated as having been made out of the donor’s income **if the donor is left with suffIcient income to maintain their normal standard of living.
3. There is no monetary limit on this exemption because diferent individuals have diferent levels of income and what is ‘normal’ expenditure out of that income will vary from person to person.

Question 14

Annual Exemption

Answer 14

1. A £3,000 annual exemption is available to reduce the IHT value of lifetime transfers. This means any individual can give away up to £3,000 of value each year outside the ex-emptions listed previously, without this giving rise to an IHT charge.
2. The annual exemption is set against gifts in chronological order in the tax year—against earlier gifts before later gifts.
3. Any unused annual exemptions may be carried for-ward for one tax year. If the annual exemption is carried forward, the current year exemption must be used before that of the previous year.**

A father gives his daughter £10,000 in May 2021 as a wedding present. The father had not given any gifts during the previous tax year. The gift will not be taxable, as the marriage exemption applies to the frst £5,000, the £3,000 annual exemption for the current tax year (2021/22) applies to the next £3,000, and (because the father had not given any gifts the year before), the remaining £2,000 can be negated by pulling forward the annual exemption from 2020/21.

Question 15

PotentiallyExempt Transfers
Definition

Answer 15

1. A Potentially Exempt Transfer (‘PET’) is a gift by one indi-vidual to another individual, that is not covered by any exemption (in full or in part) explained above. Such a transfer
   is treated as exempt whilst the donor is alive and will not give rise to a lifetime IHT charge.
2. However, if the donor dies **within seven years **of making the gift, the PET will become a chargeable transfer and any tax due will be payable by the recipient of the gift.
3. The value of a gift for IHT purposes is the value of the gift less any available exemptions.

Question 16

2

Chargeable Lifetime Transfers

Answer 16

a.Gifts to Trusts
As a trust is not an individual, gifts to trusts usually are im-mediately chargeable to tax (CLTs). The most common types of trust are **‘discretionary’ trusts and ‘interest in possession’ trusts **(as discussed in your Trusts materials). A gift to either of these is a CLT on which IHT is immediately payable. How-
ever, gifts to certain types of special trusts are not charge-able transfers, for example, gifts to charitable trusts (exempt) or to bare trusts—trusts under which the benefciaries decide when the assets are distributed (PETs).

b.Gifts to Companies
A gift to a company is also a CLT. In practice this is rare, because when an individual transfers money or assets to a company, they will usually receive either shares or deben-tures (loan stock) in return. If an individual buys shares or loan stock in a company, there are no IHT consequences as
there is no diminution to their estate.

Question 17

May Be Reduced byAnnual Exemption
CLT

Answer 17

The value of a CLT can be reduced by any available annual
exemptions.

Question 18

Tax on CLTs

Answer 18

A lifetime gift to a trust which constitutes a CLT is immediate-ly chargeable to tax. If tax is owed on the transfer, it will be paid either by the donor or by the trustees. Tax will be owed only if the gift exceeds the nil rate band (currently £325,000) after deducting any available annual exemption.

EXAMPLE
Timothy set up a discretionary trust in December 2022 with cash of £500,000. His only previous gift had been £1,000 to his son in June 2021. This PET will use some of the annual exemption for the tax year 2021/22. Therefore, Timothy has made a taxable lifetime transfer to the trust of £495,000 (£500,000 less the £3,000 2022/23 annual exemption and less another £2,000 for the part of the annual exemption remaining from the previous year). The fIrst £325,000 of this gift (the nil rate band) is taxed at 0%. Therefore, tax will be owed only on the remaining £170,000.

Question 19

Tax Rate Applicable to CLTs

Answer 19

If trustees pay the IHT, the lifetime rate is 20%. If the donor pays the tax, the rate is 25%

EXAMPLE
Same facts as the previous example. If the trustees pay the tax, it will be £34,000 (£170,000 x 20%); if Timothy pays the tax, it will be £42,500 (£170,000 x 25%). Additionally, if Timothy pays the tax, the gift will be treated as having included the tax paid (because that also diminished Timothy’s es-tate)—making the total gift £537,500 (£495,000 + £42,500). This will become important in our discussion below on cumulation and death tax.

Question 20

3

Culmulation CLTs

Answer 20

1. we need to take account of any other CLTs made by the donor in the previous seven years (the ‘cumulation **period’). We add the most recent gift to the sum of other CLTs that have been made within the previous seven years, and tax is owed if the sum of all the gifts over the seven-year peri-od exceeds the nil rate band amount.
2. When we look back seven years to identify previous CLTs, we always use the gross amount of the transfer (that is, the value transferred plus any tax paid on the transfer by the donor).
3. It is only CLTs which use up the nil rate band. PETs are not chargeable transfers, so these can be ignored.

Question 21

Procedure for calculating lifetime tax:

Answer 21

1. Identify the ‘value transferred’ using the ‘loss to donor’ principle;
2. Deduct annual exemption(s) to arrive at the CLT;
3. Identify nil rate band for year of transfer;
4. Deduct other chargeable transfers made within the seven years before the gift to arrive at the nil rate band remaining; and
5. Pay the excess lifetime transfer over the nil rate band at 20% or 25%.

EXAMPLE
In January 2023, Paula made a gift to a trust of £200,000.
The only other gift Paula has ever made was a gross charge-able lifetime transfer (after exemptions) of £155,000 in May 2017. Because May 2017 is within seven years of January 2023, the £155,000 2017 gift uses up the frst £155,000 of the nil rate band, leaving £170,000 remaining. The current chargeable transfer is £194,000 (the £200,000 transfer amount less the £3,000 annual exemption for the year the gift was made and the £3,000 unused annual exemption from the previous year). IHT must be paid on the diference between this amount and the amount of the nil rate band
remaining (£194,000 - £170,000 = £24,000). If the trustees are paying the IHT at 20%, the tax payable is £4,800.

Question 22

Death Tax on PETs

Answer 22

1. To determine whether any tax is owed on a PET made within seven years of the donor’s death, we use the nil rate band and the inheritance tax rates in force at the date of death.
2. **To work out the amount of the nil rate band which is remaining, we deduct any gross chargeable transfers made in the seven years before the PET; we do not look back seven years from death.
3. Therefore, chargeable transfers made by the donor more than seven years before death have to be considered to calculate the remaining nil rate band.

EXAMPLE
In November 2014, Vernon made a chargeable transfer (after annual exemptions) of £152,000. In January 2021, Ver-non gave £216,000 to his son. After deducting two annual exemptions, this PET was £210,000. Vernon died in Febru-ary 2022. The PET in January 2021 now fails and becomes
a chargeable transfer. At the time of Vernon’s death, the nil rate band (‘NRB’) was £325,000. The 2014 gift was made within seven years of the 2021 gift, so we have to take it into account. It used up the frst £152,000 of the NRB, leaving
£173,000 of NRB remaining. So, the frst £173,000 of the chargeable PET is taxed at 0%. That leaves the remaining £37,000 (£210,000 - £173,000) subject to 40% inheritance tax (£14,800).

Question 23

Taper Relief

Answer 23

If there are more than three years between the date of PET and donor’s date of death, taper relief is given. Taper relief reduces the tax payable by a percentage. That percentage depends on the time between the date of the gift and the date of death. Taper relief reduces the tax payable; it does
not reduce the amount of the transfer. Taper relief percentag-es are given below:

EXAMPLE
In July 2016, Marion made a £496,000 gift to her son (after exemptions). As discussed previously, this would be a po-tentially exempt gift. Marion died in March 2023. Because Marion died within seven years of the gift, the PET fails and
is subject to tax. If Marion had not used any of her nil rate band before death, the frst £325,000 of the gift is taxed at 0%, leaving the remaining £171,000 gift to be taxed at 40% (£68,400—don’t panic; remember, a calculator will be
available to you during the exam). However, as Marion died between six and seven years after making the PET, 80% taper relief is available; that is, only 20% of the £68,400 tax (£13,680) is payable by her son as recipient of the gift.

Question 24

5

Additional Tax on Chargeable Lifetime
Transfers

Answer 24

1. if an individual makes a gift into a trust (a chargeable lifetime gift, a ‘CLT’), it will be immediately chargeable to lifetime inheritance tax (at 20% or 25%).
2. If the donor dies within seven years of making the gift, there will be additional inheritance tax on death.
3. The way we calculate this additional inheritance tax is similar to the procedure we use for calculating tax on failed potentially exempt transfers. We start with the CLT, then calculate the amount of the nil rate band remaining to leave a transfer chargeable to inheritance tax. Tax is charged on the trustees at the death rate of 40%.
4. But if there are more than three years between the date of the CLT and the date of death, taper relief will be available to reduce this tax.
5. Credit for Lifetime Tax Paid
   The only diference in the calculation of tax on CLTs and tax on PETs is that the trustees will receive credit for any life-time tax paid on the CLT (whoever paid it). The diference between the death tax and the lifetime tax paid is the additional tax payable by the trustees. However, if the lifetime tax already paid exceeds the tax on death, the diference is not repaid. In this instance, the additional inheritance tax on death will simply be reduced to zero.

EXAMPLE
Orla made a chargeable lifetime gift of £645,000 (after annual exemptions) in December 2016. At that time, the nil rate band was £325,000, leaving £320,000 subject to 20% lifetime tax (£64,000). Orla died in September 2021, hav-ing made no other gifts. Because the CLT was made within
seven years of death, we must calculate whether additional death tax is owed by the trustees. We take the amount of the CLT (£645,000) and subtract out the nil rate band at the time of Orla’s death (still £325,000), which leaves £320,000 subject to the 40% death tax, which comes to £128,000. However, the CLT was made between four and fve years before Orla’s death and so is entitled to 40% taper relief, meaning that only 60% of the £128,000 (£76,800) must be
paid. The trustees already paid £64,000 in lifetime inheri-tance tax, which will be credited against the £76,800. There-fore, they now owe £12,800.

Question 25

2

TAX RELIEFS FOR LIFETIME

Answer 25

1. Business Reilef
2. Agricultural Relief

Question 26

Business Relief

Answer 26

For inheritance tax purposes, business relief (formerly known as business property relief) reduces the value of business property given as a lifetime gift to a trust or at death. The relief is given before any annual exemption, and it is given automatically if the conditions are satisfed. There is no re-quirement to make a formal claim.

Question 27

2

Relevant Business Property

Answer 27

Some property transfers are entitled to a 100% relief and some are entitled to a 50% relief.
1. 100% Relief
*A sole-trade business or a partnership interest;
*Shares in an unlisted trading company (any number – there is no minimum holding).

2. 50% Relief
   *Shares in a quoted trading company if the donor has voting control of the company (that is, more than 50% of the ordinary shares); and
   *Land or buildings or plant and machinery owned
   by an individual and used either by a partnership of which they are a member or a company they control.
   Note: Related property is considered indetermining ‘control’.

Question 28

2

Business Must Be Trading

Answer 28

1. Business relief will be given only if the business carried on by the sole trader, partnership, or company is trading.
2. A busi-ness whose trade it is to make or hold investments or to deal in property is not eligible for any business relief. For example, a company that acquires land and property either for the purposes of obtaining rental income or with a view to selling it on after it has appreciated in value, is a business which is ‘dealing in land’ and is excluded from business property relief. However, if shares are gifted in a trading company that holds some assets as investments (known as ‘excepted assets’), then business relief is available but is restricted to the company’s trading asset proportion.

Question 29

ownership
business relief

Answer 29

The general rule is that the donor must have owned the property for** at least two years **before the transfer. If this minimum ownership requirement has not been satisfed, the donor will not receive business (property) relief on the
transfer. However, there are some exceptions to the two-year ownership requirement, including replacing one business property asset with another within a three-year period and
inheriting business property assets from one’s spouse.

Question 30

2

Agricultural Relief
Definition

Answer 30

1. Agricultural relief works in a similar way to business relief. It reduces the value transferred when assets such as farmland and farm buildings are gifted either during lifetime or on
   death. It, too, is given** before any available annual exemp-tions. **It normally is available at 100% on the agricultural value.
2. If an individual dies and their estate includes agricultural property, agricultural relief is also given as a deduction in the estate when calculating death tax. The relief is automatic. No formal claim is required.

Question 31

Property Included for Agriculture Relief

Answer 31

Agricultural property means either agricultural land or build-ings used for the purposes of agriculture and situated either in the UK, the Channel Islands, the Isle of Man, or European
Economic Area State. Agricultural relief is primarily available in two situations:
*To a farmer who owns the land and buildings and uses these assets in their own business; or
*To a landowner who is letting out agricultural land or buildings to a farmer.

Question 32

Activities Excluded from Agriculture

Answer 32

Activities specifcally excluded from qualifying for agricultur-al relief include grazing horses (except in connection with a stud farm) and land used for fshing, shooting, and other sporting rights.

Question 33

2

Ownership
Agricultural Relief

Answer 33

1. To qualify for agricultural relief, the agricultural property must have been occupied by the transferor** for the purposes of
   agriculture throughout the two years prior to the transfer.**
2. In the case of** tenanted land **(that is, land let to someone else who occupies it for the purposes of agriculture), this minimum ownership requirement is extended to seven years.

Question 34

Agricultural Relief May Be in Addition to Business Relief

Answer 34

1. If a farmer runs a farming business, they will be eligible for both agricultural relief and business relief on the same transfer.
2. Agricultural relief is given in priority and applies to the agricultural value of the property discussed above (for ex-ample, farmland and farm buildings). Business relief may then be available on any excess value in respect of assets used
   in the owner’s farming business which are not agricultural
   land or buildings, such as plant and machinery and business goodwill. However, it is not available if the farmland is leased to a tenant.

Question 35

Effect of Business and Agricultural Relief
on Lifetime Transfers

Answer 35

As far as calculating lifetime tax is concerned, business relief and agricultural relief have immediate efect only for gifts into trusts (chargeable lifetime transfers), as potentially exempt transfers are not immediately chargeable. The reliefs will then have to be taken into account in calculating the inheri-
tance tax due.

Question 36

3

Definition of Death Estates

Answer 36

1. At the point of death, the deceased is treated as having made a chargeable transfer (a taxable gift) equal to the net value of their assets at the date of their death.
2. . Net value means the total value of all the assets owned by the de-ceased at death less funereal expenses and any debts or
   liabilities owed by the deceased at the date of death.
3. Tax on the death estate is paid by the Personal Representatives (‘PRs’).

Question 37

Calculating Tax on Death

Answer 37

1. the annual exemption is not available to reduce the value of the chargeable death estate.
2. We start with the nil rate band for the year of death. As inheritance tax is a cumulative tax, the nil rate band is reduced by any chargeable transfers (potentially charge-able transfers and chargeable lifetime transfers) made in the seven years prior to death.
3. After applying the nil rate band to gifts made in the seven years preceding death, if any NRB is remaining, we de-duct it from the death estate to determine the amount of the death estate that is chargeable to inheritance tax. Tax is charged at the death rate of 40%.
   When calculating tax on the death estate, it is common to fndthat PETs and CLTs in the seven years prior to death have used up the whole of the nil rate band. On many occasions there-
   fore, the whole of the death estate is fully charged at 40%.

EXAMPLES
1) Katrina, who never married, died on 1 June 2022. Her net estate at the date of death was valued at £400,000. Her entire estate was inherited by her sister Francesca. Katrina
had not made any lifetime gifts. The inheritance tax payable on Katrina’s estate is £30,000: £400,000 estate - £325,000 nil rate band = £75,000 x 40% = £30,000.
2) Same facts as above, but additionally Katrina also trans-ferred £106,000 to Francesca in October 2020 (a £100,000 PET after applying available annual exemptions). The PET
would become a chargeable transfer on Katrina’s death as she died within seven years of making the PET. We would apply the nil rate band available on Katrina’s death to the
PET frst, reducing the nil rate band available to cover her £400,000 death estate to £225,000. The PRs would have to pay £70,000 in inheritance tax: £325,000 nil rate band - £100,000 PET = £225,000 nil rate band remaining.
£400,000 estate - £225,000 nil rate band = £175,000 x 40% = £70,000.

Question 38

2

Exempt Gifts
death estate

Answer 38

a.Gifts to a Spouse/Civil Partner
If an individual makes a gift to their spouse on death, this gift is completely exempt. However, as mentioned earlier, the exemption is restricted to £325,000 if the deceased was UK domiciled and the recipient spouse is non-UK domiciled.
b.Gifts to a Charity
Gifts to UK/EEA charities on death are also completely ex-empt.

Question 39

3

Liabilities May Be Deducted

Answer 39

Liabilities are deductible from the assets. Allowable liabilities include mortgages, income tax owed by the deceased, and
reasonable funeral expenses. Probate costs are not deduct-
ible in the IHT calculation

Question 39

3

Valuation

Answer 39

2. The value of an asset at the date of death is its ‘open market value’.
   This means the price which the assets might reasonably be expected to fetch if sold on the open market at the point of death.
3. .Quoted Shares
   To value quoted shares, we look at the ofcial list published by the Stock Exchange at the date of death.
4. .JointlyOwned Assets
   If assets are owned jointly by spouses or civil partners, when valuing the assets for inheritance tax purposes, we must con-sider the ‘related property’ rules discussed previously.

Question 40

2

Lower Rate Where Part of Estate Left to
Charity

Answer 40

As an incentive to encourage charitable giving, where 10% or more of the deceased’s net estate has been left to a charity, the taxable estate is charged at** 36%** instead of the normal 40%.
a.Calculating 10%
The lower rate applies if the total amount left to charity is at least 10% of the ‘baseline amount’. The baseline amount is the value of the estate charged to IHT after deducting
all **available reliefs, exemptions, and the available NRB, **but excluding the exemption for the charitable legacy itself. The
Residence Nil Rate Band (discussed later) is ignored when calculating the baseline amount.

Question 41

The Transferable Nil Rate Band

Answer 41

If an individual dies leaving some or all of their nil rate band (‘NRB’) unused, a claim can be made for the unused propor-tion to be transferred to their spouse. The spouse to whom the unused portion is transferred will then have an uplifted
NRB to use against inheritance tax liabilities arising on their death. Note that the uplifted NRB cannot be used against
lifetime tax on chargeable lifetime transfers.

Question 43

Claiming the Transferable NRB

Answer 43

On the death of the frst spouse, the unused NRB is recorded but no claim is made. However, a claim needs to be made by the executors of the second spouse. The uplifted NRB is thereafter used in the calculation of all inheritance tax liabilities arising from death. This will include any tax on PETs & CLTs as well as the death estate.

Question 44

Calculated as a Percent of Unused Portion

Answer 44

The uplifted NRB is, strictly, a percentage increase equivalent to the percentage of the NRB unused by the frst spouse to die.
EXAMPLE
Mr A died at a time when the NRB was £300,000. £30,000
(10%) of his NRB was used on gifts made at his death. Thus,
the unused portion is 90%. If Mrs A dies when the NRB is
£325,000, we do not transfer the £270,000 of NRB unused by her husband’s estate. Rather, we uplift Mrs A’s NRB by
90% (the percentage of the NRB not used by Mr A’s estate),
resulting in an additional £292,500 of NRB for Mrs A (that is, 90% of the current NRB). Thus, Mrs A’s total available NRB
for calculating death tax is £617,500 (£325,000 + £292,500, which is 190% of £325,000).

Question 45

NRB Can Transfer from up to Two Spouses

Answer 45

If a taxpayer has survived more than one spouse, the NRB on death is calculated by taking into account the unused pro-portion of each deceased spouse. However, the proportion transferable is limited to an additional 100%. Therefore, the maximum NRB any person can have is 2 × the NRB for the year of death.

Question 46

3

Residence Nil Rate Band

Answer 46

1. An additional, residence nil rate band is available if an estate includes a home that was used as the deceased’s private residence at some point if the residence or proceeds of the residence are left to lineal descendants (such as children or grandchildren) or spouses of such descendants.
2. Note: ‘Children’ include step-children, adopted children, and foster children, but the relief is not available to a person or a couple without children.
3. Calculating the Residence NRB
   The Residence NRB is the value of the dwelling at the time of death (after deducting liabilities such as a mortgage secured on that property) up to the residential nil rate band limit (cur-
   rently £175,000).

Question 47

b.No Subsequent Occupancy Requirement
Residence NRB

Answer 47

There is no requirement for the descendants of the de-ceased to occupy the residence after death. In many cases the property will be sold and the cash proceeds subsequent-ly distributed to the children/grandchildren to satisfy the lega-cy. This does not negate the Residence NRB.

Question 48

Residence NRB Applicable to Death Estate Only

Answer 48

The Residence NRB applies to the death estate only. It does not apply to a lifetime transfer of a residence (for example, a potentially exempt transfer which becomes chargeable as a result of death).

Question 49

Residence NRB Tapering for Estates Exceeding £2 Million

Answer 49

1. For estates with a net value over £2 million, the Residence NRB is tapered away at the rate of £1 for every £2 over that limit.
2. ‘Net value’ means assets less liabilities but before deducting reliefs (such as agricultural and business reliefs) and exemptions (spouse/charity).
3. Thus, the Residence NRB is eliminated for estates over £2.35 million as of the 2020/21 tax year.

EXAMPLE
Larry died in May 2023. His estate, net of liabilities, was valued at £2.3 million. The estate included a main residence worth £1.6 million and a business worth £400,000 that qual-ifed for 100% business relief. Larry had never married, and he left his entire estate to his daughter Charlotte. He made no lifetime transfers. The residence nil rate band for the year Larry died was £175,000. The Residence NRB is available, as Larry left a qualifying residential property to his daughter. However, the Residence NRB will be tapered because the estate exceeds £2 million. The business relief available is ignored for this purpose. So, for purposes of calculating the Residence NRB, the estate is £2.3 million. The reduction is 50% of the amount of the estate over £2 million. Here that’s 50% of £300,000, or £150,000. So we taper the £175,000 Residence NRB by £150,000, leaving a Residence NRB of £25,000.
Therefore, the inheritance tax payable as a result of Larry’s death will be £620,000: £2,300,000 total estate - £400,000 business relief = £1,900,000 - £25,000 Residence NRB = £1,875,00 - £325,000 general NRB = £1,550,000 x 40% death tax rate = £620,000.

Question 50

3

Transferable Residence NRB

Answer 50

In the same way that a percentage of any unused general NRB can be transferred between spouses, a percentage of any unused Residence NRB can also be transferred between spouses on death (the ‘brought forward allowance’).

The brought forward allowance is tapered away if the trans-feror spouse’s estate exceeded £2 million.

If an individual has more than one deceased spouse, more than one brought forward allowance can be claimed. However, the total brought forward allowance is capped at 100% of the Residence NRB for that tax year.

Question 51

Downsizing
Residence NBR

Answer 51

1. An estate will also be entitled to the Residence NRB if thedeceased downsized to a less valuable home or sold orgave away their home.
2. The downsizing rules will typically
   apply where a residence valued in excess of the Residence NRB is sold and replaced with a new residence which is valued at less than the Residence NRB at the date of death.
3. In this case, the full benefIt of the Residence NRB is not lost and instead the estate can claim a ‘downsizing addition’which uplifts the amount of the Residence NRB in the death estate.

EXAMPLE
Steve owned a residence (property A) which he sold in July 2021 for £400,000. He downsized to property B costing £280,000. On his death in May 2023, Steve left 1/4 of that property to his daughter and the remainder to his wife.
The Residence NRB is limited to £70,000 (1/4 of £280,000) and, so, £105,000 is potentially wasted. However, downsiz-ing relief is available. The downsizing addition is a multi-step calculation which would, in the new situation described
above, result in the full £175,000 RNRB being available. This would comprise £70,000 RNRB for Property B and a downsizing addition of £105,000 in relation to Property A.
Essentially, though, in these cases the full RNRB would be available on the death estate.

Question 52

Other Reliefs in the Death Estate

Answer 52

a.Quick Succession Relief
Quick succession relief is given when an individual’s estate had been increased by a chargeable transfer made to them in the fIve years before death.

** A chargeable transfer is a gift whose value has been charged to inheritance tax, such as a gift received from another person’s estate on their death or a potentially exempt transfer made within seven years of the donor’s death.**

There is no requirement for the gifted property to still be owned by the deceased at the date of death for quick succession relief to apply.

EXAMPLE
Paul died in May 2021, leaving a UK house in his will to Beatrice. At Paul’s death, inheritance tax of £50,000 was paid in respect of the house. Beatrice died in March 2023.
Beatrice’s estate will be given quick succession relief on account of the gift from Paul because Beatrice died within fIve years of receiving the gift and the donor’s estate (Paul’s estate) had paid tax with respect to the gift.

Question 53

Amount of Relief
quick succession relief

Answer 53

you are not likely to be called upon to calculate the amount of the relief during your
exam. It is sufcient to know that quick succession relief exists, it applies when someone dies within fve years of inheriting something on which inheritance tax was paid, and perhaps that it decreases by 20% for each year be-tween the donor’s death and the recipient’s death.

Question 54

3

POST-MORTEM RELIEFS

Answer 54

Usually, inheritance tax is charged on the net value of the deceased’s assets at the date of death. However, in certain circumstances, claims can be made to substitute a lower value in the death estate for assets which have been sold by the Personal Representatives (‘PRs’) after the date of death. At a basic level, the rules relate to the following:
1. Quoted Shares
Relief is available if the PRs sell quoted shares, units in authorised unit trusts, or shares in open-ended investment companies** at a loss** within** 12 months **of the date of death. To calculate the allowable loss, the PRs must take account of all sales of quoted shares, unit trusts, or shares in open-ended investment companies in the 12-month period running from the date of death. Profts and losses are aggregated. As inheritance tax would have already been paid based on the value of assets at the date of death, a post-mortem claim will usually generate a repayment of inheritance tax.

2. Land and Buildings
   Post-mortem claims can also be made for sales of land and buildings. The relief works in much the same way as losses on sales of quoted shares. Relief is available for any sales of land and buildings** within three years** of the date of death. To calculate the overall loss, we aggregate together all profts and losses in the three-year period, and any resulting loss is deducted from the value of the estate for inheritance tax purposes. If the executors sell land and buildings at a loss in the fourth year, these** losses** can also be counted when working out the overall allowable loss. Any sales at a proft in the fourth year can be ignored.
3. Woodlands Relief
   If the deceased’s estate included land in the UK which was not eligible for agricultural or business relief but on which trees and underwood are growing, woodlands relief may be available. The deceased must have been benefcially entitled to the land for** five years **prior to death (or had inherited the land on the death of another). The relief operates by
   excluding the value of the woodlands from the estate.

Question 55

ANTI-AVOIDANCE RULES
21.7.1 Gifts with Reservation of Beneft

Answer 55

The ‘gifts with reservation of benefIt’ rules are an anti-avoid-ance measure to prevent a donor from giving away an asset but continuing to derive some beneft from that asset after the gift had taken place. If an individual gives away an asset but continues to be able to beneft from that asset, it is treat-ed as still forming part of the donor’s estate at the date of death (that is, we pretend that the donor still owns the asset at their death).

Question 56

Anti avoidance rule Rules Do Not Apply If Donor Pays Market Rent

Answer 56

The gifts with reservation of beneft rule will not apply if the donor pays market rent for continued occupation of a prop-erty given away. Neither do the rules apply to situations in which HMRC has issued guidance on where it considers that an insignifcant benefIt would remain.

Question 57

4

Anti-Avoidance Rule May Be Avoided by Releasing Property Before Death

Answer 57

1.The donor can avoid the gift with reservation of benefIt rule by releasing the reservation before they die.
2.An asset is treated as forming part of the donor’s death estate only if the donor has retained a beneft at the date of death.
3. If the donor releases their beneft (for example, by moving out of
the house), there is no charge in the death estate.
4. However, to avoid ‘death bed’ releases of benefts to thwart the inheritance tax scheme, HMRC treat the release of a reservation as being a potentially exempt transfer at the date of release. The PET is the value of the asset at the date the donor releases his beneft.

Question 58

2

Double Taxation Relief
gifts with reservation of
beneft

Answer 58

1. In certain rare circumstances, the gifts with reservation of beneft rule may lead to a double charge to tax (for example, if the original of a house is a potentially exempt transfer and
   the donor dies within seven years of making the gift whilst still living in the house).
2. HMRC will grant ‘double charges re-lief” by computing tax on the PET only vs tax on the gift with reservation of beneft only and charging whichever of the two results in the most tax. (In most circumstances, taxing the house in the death estate and ignoring the PET will produce a higher tax charge.)

Question 59

Pre-Owned Asset Tax

Answer 59

1. In certain situations, the gifts with reservation of beneft rule provisions do not apply or can be avoided (for example, by selling a house, and making a cash gift of the proceeds, which is then used by the donee to purchase a property that
   the donor lives in, rent-free). In such cases, the Pre-Owned Asset Tax legislation may apply.
2. The Pre-Owned Asset Tax rules impose an income tax charge on benefits received by the former owner of the property if:
   *The former owner benefts directly or indirectly from an asset they previously owned; and
   *The transfer is not within the gifts withreservation of beneft rules.

Question 60

PAYMENT OF INHERITANCE TAX
CLT

Answer 60

a.Due Date
IHT due on a chargeable life transfer is payable by the later of **six months **from the end of the month in which the CLT was made and 30 April after the tax year in which it was made.

b.Liability and Burden
Primary liability for IHT due on a CLT falls on the transferor (the donor). Sometimes the transferor will want the trustees to pay the tax, as we’ve discussed, and they will use the trust fund to do so.

If the transferor is liable but fails to pay, HMRC can pursue the recipients of the transfer (or even the benef-ciaries in extreme cases).

c.Additional Tax on Death
Any additional tax on death arising from a CLT is always due six months after the end of the month in which death oc-curred. The liability falls on the** trustees** (as the transferor is dead). However, the burden falls on the trust fund and, thus, the trust benefciaries. In extreme cases, the PRs may be-come liable, if the tax remains unpaid 12 months after the end of the month of death.

Question 61

PAYMENT OF INHERITANCE TAX
PET

Answer 61

As we’ve already discussed, there is no lifetime tax on a potentially exempt transfer. Any death tax on a PET that becomes chargeable (because the donor dies within sev-en years of the gift) is due six months from the end of the month of death of the transferor. The recipient is liable for this (and sufers the burden of the tax). If the tax remains un-paid 12 months after the end of the month of death, the PRs become liable.

Question 62

4

PAYMENT OF INHERITANCE TAX
Transfer on Death

It is important to understand who is liable to pay inheritance tax (in other words, pays the tax to HMRC) and who, if difer-ent, bears the burden of inheritance tax (that is, who ultimate-ly sufers the tax).

Answer 62

a.Due Date
Inheritance tax on death is due six months after the end of the month in which death occurs.

b.Liability and Burden
Liability for the tax and who has the burden of paying de-pends on the property concerned:
1. Freehold Estate: The** PRs** are liable for the inheritance tax on a freehold estate. If the will is silent as to burden, it falls on the residue. Foreign property suffers the inheri-tance tax on it.
2. Settled Property in Which the Deceased Had an Interest: If the property is held in trust, the trustees are liable, and the burden falls on the trust assets (depleting them for the remaining benefciaries).
3. Gifts with Reservation of Beneft: If the property in-volved was given as a gift, but a beneft was reserved, the donee of the gift is primarily liable to pay the inheri-tance tax attributable to the property. If unpaid 12 months after the end of the month of death, the PRs become liable.
4. Property Passing Other than Under Will or Intestacy: If the property passes other than by will or intestacy (for example, the property is an interest passing from one joint tenant to another), liability will fall on the PRs but will be borne by the benefciary.

Question 63

Instalment Option
payment of tax

Answer 63

An individual or a PR may make a claim with HMRC to pay inheritance tax by instalments. If such a claim is made, the tax is payable in 10 equal annual amounts. The frst payment is
due on the normal due date (that is, six months from the end of the month of death, or the normal due date for lifetime tax, whichever is appropriate).