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(FLK2) Wills and Estates > Inheritance Tax > Flashcards

Inheritance Tax Flashcards

1
Q

What are the Current IHT Rates?

A
  • Nil Band: 0%.
  • Lifetime Rate: 20%.
  • Death Rate: 40%.
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2
Q

What are the Types of IHT Trigger Events?

A
  • Potentially Exempt Transfers (“PET”): Lifetime transfers of value that are not chargeable if the Transferor survives for seven years after the Transfer.
  • Lifetime Chargeable Transfers (“LCT”): Lifetime transfers of value that are chargeable:
    • Automatically; or
    • If the Transferor does not survives for seven years after the Transfer.
  • Death: The chargeable, deemed-automatic transfer of estate that triggers upon death.

IHTA 1984 — ss. 3, 4.

Remark that the Taxable Estate is not the same as the Succession Estate, so a separate calculation for IHT purposes will be required.

LCTs most often involve a Trust.

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3
Q

What is a Chargeable Transfer?

A

A non-exempt transfer of value made by an individual.

IHTA 1984 — s. 2(1).

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4
Q

What is a Transfer of Value?

A

A disposition resulting in an immediate decrease in the value of an individual’s estate.

IHTA 1984 — s. 3(1).

In other words, gifts and undervalued transactions.

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5
Q

How does the Trigger Event determine Valuation?

A
  • Lifetime Transfer (“LTs”): Assessed by reference to the loss in value to the Donor.
  • The Death Estate: Assessed by reference to the open market value at the time of death.

IHTA 1984 — s. 160.

LTs are still valued with reference to the market. The specific phrasing used above is to ensure undervalued transactions are caught.

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6
Q

What is the Basic Nil Rate Band (“BNRB”) for Individuals?

A

£325,000. An individual’s surviving Spouse or Civil Partner can inherit the unused percentage thereof (“TNRB”).

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7
Q

What is the Residential Nil Rate Band (“RNRB”) for Individuals?

A

£175,000. However, this only applies to individuals who:

  • Died on or after 06/04/2017; and
  • The Death Estate included a Qualifying Residential Interest (“QRI”); which was
  • Closely inherited by a direct descendant.

TNRB applies if the above also applies.

If only part of the QRI is closely inherited, only that share’s chargeable is accounted for in the calculation.

If the Deceased’s share or interest in the QRI is less than £175,000, the RNRB is capped at that value.

Where it is claimedm it is applied to the Death Estate as a whole rather than set-off against the gift separately.

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8
Q

What is a Qualifying Residential Interest?

A

A single Residential Property Interest that is part of the Deceased’s Estate immediately before death.

Where the are several such residential property interests, the PRs must nominate one of them as the QRI.

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9
Q

What is a Residential Property Interest?

A

An interest in a dwelling-house that the Deceased occupied as their residence during their period of ownership for some time.

This includes property the Deceased did not live in, but intended to, in due course.

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10
Q

What does it mean for the Qualifying Residential Interest to be Closely Inherited?

A

The Beneficiary recevies it:

  • As a gift under the Will.
  • By operation of survivorship.
  • By operation of the Intestacy Rules.
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11
Q

What does it mean for the Qualifying Residential Interest to go to a Direct Descendent?

A
  • The Deceased’s Lineal Descendants;
  • The Partner of any Lineal Descendant;
  • The Survivor of any Lineal Descendant who has not predeceased the Deceased or re-married.

Adopted children, step-children of a Spouse, (if their parent was married to the deceased), foster children, and children for whom the Deceased was a guardian or special guardian are considered Lineal Descendants.

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12
Q

Is RNRB available to all Estates?

A

Tapered:

  • Estates Worth Over £2,000,000 (After Debts, Before Exceptions and Reliefs).

Unavailable:

  • Estates Worth £2,350,000 or more (After Debts, Before Exceptions and Reliefs).
  • Estates Worth £2,700,000 or more (After Debts, Before Exceptions and Reliefs) with a fully transferred RNRB.

‘Tapered’ means the allowance is reduced by £1 for every £2 over the threshold.

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13
Q

What is the Effect of Downsizing?

A

It allows an Estate to qualify for full RNRB even if:
* The Deceased no longer owned a QRI at death, or
* If their QRI at death was worth less than the cap.

Downsizing makes up the difference in RNRB that would be lost because the original home was sold or replaced with a less valuable one. Accordingly, if there is no discrepancy, it does not apply.

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14
Q

How does an Estate qualify for Downsizing?

A
  • The Deceased must have sold or downsized on or after July 2015.
  • The home sold would have qualified for RNRB.
  • A Direct Descendant must inherit the present QRI.
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15
Q

When does the TNRB become available to a Survivor?

A

After they die. Accordingly, it cannot be claimed on LCTs made whily they were alive.

The date of the first Partner’s death does not matter, but the Survivor must have died after the introduction of the TNRB (2007 for BNRB, 2017 for RNRB).

Individuals who have survived multiple Partners can claim the TNRB in respect of all of them, subject to a cap of 100% BNRB.

Individuals who would be entitled to claim a TNRB can also pass this on to any subsequent Partners they have, subject to the same cap.

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16
Q

Who makes the Claim for TNRB?

A

The Survivor’s PR.

They would do so in the Estate’s tax filings.

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17
Q

What is the Time Limit for Claiming TRB?

A
  • Within two years of the end of the month of death; or
  • Within three months of the PRs first acting.

Whicever is later.

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18
Q

What is the Tax Treatment of PETs?

A
  • The Transfer is not chargeable when it is made.
  • The Transfer becomes fully exempt if the Transferor survives seven years to date from the Transfer Date.
  • If the Transferor dies within seven years of the Transfer Date, the Transfer is reassessed as part of the Deceased’s Estate.
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19
Q

What is the Tax Treatment of LCTs?

A
  • The Transfer is chargeable when it is made at 20%.
  • If the Transferor survives seven years to date from the Transfer Date, there are no further taxes.
  • If the Transferor dies within seven years of the Transfer Date, the Transfer is reassessed as part of the Deceased’s Estate.
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20
Q

Generally, who is Liable to pay IHT on LCTs and Failed PETs?

A
  • The Donee or Trustee.
    • Initial Tax must be paid roughly within one year of the Transfer Month.
    • Subsequent Tax must be paid within 12 months of the Death Month.
  • If they fail to pay, the Donor (or their PRs) becomes liable.

This applies to both Initial and Subsequent Taxation.

In other words, the Donor (or the Estate) always have secondary tax liability. Alternatively, the Donor can voluntarily assume primary tax liability.

On the deadline for Initial Taxation,

  • If the Transfer is made between April 6 and September 30, tax is due by April 30 of the following year.
  • If the LCT is made between October 1 and April 5, tax is due six months after the end of the Transfer Month.
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21
Q

Generally, who is Liable to pay IHT on the Taxable Estate?

A

The PRs, namely using the Residuary Estate unless contrary intention can be shown in the Will.

If an Asset passes outside the Succession Estate, such as Property held as Joint Tenants or GROBs, the relevant counterparty is liable to pay tax.

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22
Q

What is Grossing Up?

A
  • This only applies if the Donor pays the IHT on an LCT.
  • Where it applies, the Chargeable Value of the LCT is increased by the IHT paid.
  • This called the Grossed-Up Value.
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23
Q

What is the Principle of Cumulation?

A

All Taxable Transfers made in the seven years before Death are summed before the Estate’s tax burden is calculated.

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24
Q

What is the Formula for Calculating IHT on Failed PETs and LCTs?

A
  1. Calculate the Cumulative Total.
  2. Determine the Lifetime Transfer’s value.
  3. Apply Exemptions and Reliefs to calculate the Chargeable Value.
  4. Deduct BNRB from the Cumulative Total.
  5. Calculate the IHT at 20% on the Excess.
  6. Reassess the Transfer if the Transferor Dies within 7 years.
  7. Apply Taper Relief.
  8. Deduct RNRB and TNRB from the Cumulative Total.
  9. Calculate the IHT at 40% on the Excess.
  10. Deduct the IHT paid at the Lifetime Rate.

In this case, the Cumulative Total refers to the Total Chargeable Value of Transfers made in the 7 years before the Lifetime Transfer, exceptions and reliefs included. As such, this does not include pending or successful PETs.

Reassessment can extend the Lookback period up to 14 years, since you are now considering the 7 years before Death and the 7 years before the Lifetime Transfer.

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25
Q

What is the Formula for Calculating IHT on Death?

A
  1. Calculate the Cumulative Total.
  2. Identify the Assets included in the Taxable Estate.
  3. Calculate the Taxable Estate.
  4. Deduct Debts and Expenses.
  5. Apply Exemptions and Reliefs.
  6. Deduct BNRB, RNRB, and TNRB from the Cumulative Total.
  7. Calculate the Estate’s tax burden.

In this case, the Cumulative Total refers to the Total Chargeable Value of Transfers made in the seven years before Death, exceptions and reliefs included. As such, this does not include pending or successful PETs.

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26
Q

What is the Rule of Thumb for calculating the Taxable Estate?

A

Everything not specifically excluded is included.

Notable inclusions are:

  • Statutory nominations.
  • Donationes mortis causa.
  • All jointly-owned property.
  • Some interests in possession.
  • Property subject to a reservation.

Notable exclusions are:

  • Excluded property.
  • Discretionary pension scheme payments.
  • Insurance policies written in trust for a third party.
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27
Q

What is a Property Subject to a Reservation?

A

A disposition where the Donor reserves a benefit in an asset post-transfer.

You can avoid this by paying market value for use of the benefit.

The asset’s value at the time of death is what counts for tax purposes.

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28
Q

Which Interests in Possession are most relevant for Tax purposes?

A
  • Interest in Possession Trusts.
  • Prior to 22/03/2006, the capital invested therein was considered property of the Life Tenant for tax purposes.

This is still the case for any such Trust created before 22/03/2006 or any such Trust created by Will post-mortem.

Today, the only way to avoid this is to create any such Trust while the Settlor is alive.

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29
Q

What is the most common for of Excluded Property?

A
  • A Remainder Interest in a Life Interest Trust.
  • If the Remainderman predeceases the Life Tenant, the property they would have received does not pass into their Taxable Estate.
  • However, where a Life Tenant dies, the value of the Trust is included in their Taxable Estate.
30
Q

How is the Value of the Taxable Estate calculated?

A

By reference to the market value at the time of death.

  • For Quoted Shares, you take the lower of the two prices on the Stock Exchange Daily List and add one-quarter of the difference to the lower price.
  • For Related Property, if assets owed by spouses are worth more when valued together, each party’s asset is valued at their proportionate share of the combined pair.
  • For Joint Property, the value of the Deceased’s share is reduced by 10%, except if the co-owners were married or the property is not real estate.
31
Q

Which Debts and Expenses are Tax Deductable?

A
  • The Deceased’s debts due at the time of death; and
  • Reasonable funeral expenses and the cost of a tombstone.
32
Q

Which Tax Exemptions only apply to LCTs?

A
  • Marriage Exemption.
  • Small Gift Allowance.
  • Family Maintenance Exemption.
  • Normal Expenditure from Income.
33
Q

What is the Marriage Exemption?

A

An Allownace for Gifts made in consideration of Marriage or Civil Partnership. The following limits apply per Donor:

  • Parents: £5,000.
  • S/CPs: £2,500.
  • Grandparents: £2,500.
  • Anyone Else: £1,000.

The Marriage Exemption can be combined with the Annual Exemption.

Here, ‘Grandparents’ includes other Ancestors, like Great Aunts.

34
Q

What is the Small Gifts Allowance?

A
  • An Allowance of £250 per Recipient per year for Gifts.
  • If a Gift exceeds £250, the entire Exemption for that Recipient is lost.

The Small Gift Allowance cannot be combined with the Annual Exemption.

35
Q

What is the Family Maintenance Exemption?

A

An Exemption for maintenance payments made to support dependents. This includes:

  • Minors.
  • Dependent Relatives.
  • Current and former S/CPs.

For Minors, support extends to maintenance, education, or training.

36
Q

What is the Normal Expenditure from Income Exemption?

A

An Exemption for Gifts:

  • Made from a Donor’s income;
  • Arising from a normal pattern;
  • That do not reduce the Donor’s standard of living.
37
Q

Which Tax Exemptions apply to both LCTs and Death?

A
  • Annual Exemption.
  • Spouse Exemption.
  • Charity Exemption.
  • Gifts to Political Parties.
  • Gifts of Land to Housing Associations.
  • Gifts to Employee Benefit Trusts (“EBTs”).
  • Gifts for National Purposes or to Heritage Maintenance Funds (“HMFs”).
38
Q

What is the Annual Exemption?

A

£3,000, which if unused, carries forward to only the following year (£6,000, maximum).

The Exemption is applied chronologically, but if multiple Gifts are made on the same day, then pro rata.

39
Q

When does the Spouse Exemption apply?

A

Upon making any Gifts in life or upon death to a Spouse. However, note the following:

  • If the Deceased’s assets are placed into a Life Interest Trust, and their Surviving Spouse is named the Life Tenant thereof, the exemption applies.
  • If, however, the Surviving Spouse is named the Remainderman, the exemption does not apply.

IHTA 1984 — s. 18.

This presumses both parties are domiciled in the UK and that the Gift does not impose conditions which cannot be satisfied within one year.

40
Q

When does the Charity Exemption apply?

A

Upon making any Gift to a UK-registered charity, in life or death, so long as:

  • The Gift is absolute;
  • The Gift is immediate, not in remainder;
  • The Gift is used exclusively for charitable purposes; and
  • The Gift does not impose conditions that cannot be satisfied within one year.

IHTA 1984 — s. 23.

A condition that can be satisfied within one year, but is not, will disapply the exemption.

41
Q

What constitutes a Gift to a Political Party?

A

A Gift to a Political Party that, as of the last General Election, had at least:

  • Two MPs elected; or
  • One MP elected and 150,000 votes won by party candidates.

IHTA 1984 — s. 24.

42
Q

What constitutes a Gift of Land to a Housing Association?

A

A Gift of Land to any UK-registered Housing Association or Social Landlord.

IHTA 1984 — s. 24A.

43
Q

What constitutes a Gift for National Purposes?

A

A Gift to any entity listed in Sch. 3.

IHTA 1984 — s. 25.

These largely include galleries, museums, national trusts, local authorities, universities, and government departments.

44
Q

What constitutes a Gift to a Heritage Maintenance Fund?

A

A Gift to a Trust with that designation. Such Trusts exist to maintain buildings or land of scenic, scientific, and historic interest.

IHTA 1984 — s. 27.

45
Q

Which Tax Reliefs apply only to LCTs?

A

Taper Relief.

46
Q

What is Taper Relief?

A

A reduction in the tax rate payable the later the Transferor dies from the date of Transfer.

  • 3-4 years: 32% payable.
  • 4-5 years: 24% payable.
  • 5-6 years: 16% payable.
  • 6-7 years: 8% payable.

All these benchmarks are year-to-date.

47
Q

Which Tax Reliefs apply to both LCTs and Death?

A
  • Business Property Relief (“BPR”).
  • Agricultural Property Relief (“APR”).
48
Q

What is the Effect of Business Property Relief?

A

To reduce the value of a taxable transfer by the amount attributed to the business property.

IHTA 1984 — ss. 103-114.

49
Q

When does Business Property Relief apply?

A

When a person owns a Qualifying Business Asset (“QBA”) for a Qualifying Period.

50
Q

What constitutes a Qualifying Business Asset, and what are their Rates of Relief?

A

50%:

  • Quoted Shares, but only if the owner is the Majority Shareholder.
  • Personally-owned assets used for business by a commercial entity the Taxpayer controlled.

100%:

  • Unquoted Shares.
  • Business or interest in a business.

In this case, ‘Majority Shareholder’ means someone with over 50% of the outstanding voting shares.

51
Q

When will an Asset be Considered an Investment rather than Business Property?

A

When it is primarily concerned with making or holding investments.

Rental Property is considered an investment asset.

52
Q

What is the Qualifying Period for Business Property Relief?

A

Continuous ownership of the QBA for at least 2 years immediately prior to the relevant transfer.

Note the following:

  • If one inherits a QBA, the date of acquisition is the date of death.
  • If the QBA is sold and replaced, ownership will usually be considered continuous.
  • If one inherits a QBA from their Spouse, they also inherit the Spouse’s period of ownership.
53
Q

How does Business Property Relief apply to Failed PETs and LCTs?

A

It only applies if:

  • The Transferee maintains ownership of the Asset; and
  • The Asset qualifies for BPR when the Transferor or Transferee die, whichever is earlier.

There is no minimum two-year period.

54
Q

What is the Effect of Agricultural Property Relief?

A

To reduce the value of a taxable transfer by the amount attributed to the agricultural property.

55
Q

When does Agricultural Property Relief apply?

A

When a person owns a Qualifying Agricultural Property (“QAP”) for a Qualifying Period.

56
Q

What constitutes Qualifying Agricultural Property?

A
  • Agricultural land and buildings, used for agricultural activities.
  • Farmhouses and cottages, if they are of a character appropriate to agriculture and have been occupied for such purposes.
57
Q

What are the Rates of Relief for Agricultural Property Relief?

A

50%:

  • Tenancies without concession created before 01/09/1995.

100%:

  • Owner-occupation.
  • Leasehold with the right to vacant possession within one year of transfer.
  • Leasehold on or after 01/09/1995.

The latter is most often the case.

58
Q

What is the Qualifying Period for Agricultural Property Relief?

A
  • Continuous occupation by the Transferor for agriculutural purposes for at least 2 years immediately prior to the relevant transfer; or
  • Continuous ownership by the Transferor or another for agriculutural purposes for at least 7 years immediately prior thereto.

Note the following:

  • If one inherits a QBA, the date of acquisition is the date of death.
  • If the QBA is sold and replaced, ownership will usually be considered continuous.
  • If one inherits a QBA from their Spouse, they also inherit the Spouse’s period of ownership.
59
Q

How does Agricultural Property Relief apply to Failed PETs and LCTs?

A

It only applies if:

  • The Transferee maintains ownership of the Asset; and
  • The Asset qualifies for APR when the Transferor or Transferee die, whichever is earlier.

There is no minimum two-year period.

60
Q

Where both Agricultural and Business Property Relief apply, which takes priority?

A

Agricultural Property Relief.

It is not possible to claim BPR on a business asset if it also qualifies for APR.

Both reliefs may apply in the context of commercial farming enterprises. For example, agricultural buildings may qualify for both, so APR applies in priority

61
Q

Which Tax Reliefs are only available upon Death?

A
  • Woodland Relief.
  • Quick Succession Relief.
62
Q

What is the Effect of Woodland Relief?

A

To defer the tax payable on the Woodland’s value until its timber, not land, is later sold or given away.

IHTA 1984 — s. 125.

To use the deferral, the PRs should make an election to exclude the Woodland’s value from the Death Estate.

Because Woodland Relief is only a deferral, BPR and APR should instead be used where possible.

63
Q

What is the Qualifying Period for Woodland Relief?

A
  • Continuous ownership by the Deceased for at least 5 years before death.
  • If the Deceased inherited the Woodland, this requisite disapplies.
64
Q

When does Woodland Relief apply?

A

If the Deceased owned a Woodland for a Qualifying Period.

65
Q

What is the Effect of Quick Succession Relief?

A

To avoid double taxation on assets received by succession.

66
Q

When does Quick Succession Relief apply?

A
  • The Deceased dies;
  • Their Death Estate includes assets received by way of gift or inheritance;
  • In the 5 years before their death; and
  • These assets were subject to an IHT charge when originally transferred.

IHTA 1984 — s. 141.

67
Q

What are the Duties of the Estate’s Personal Representatives under the Act?

A
  • Deliver an account to HMRC of the Deceased’s Estate (Form IHT 400).
    • Deadline of 12 months from the end of the Death Month.
  • Pay any IHT due by the Succession Estate.
    * Deadline of **6 months** from the **end** of the **Death Month**;

* However, **IHT400 submission automatically triggers** the **obligation to pay** IHT.

IHTA 1984 — s. 216.

The Account should detail:
* The Deceased’s Taxable Estate immediately before death;

  • The value of each item at the date of death; and
  • Any applicable reliefs and exemptions.

Omissions or valuation errors can be corrected by later submitting Form C4.

68
Q

What is the Instalment Option for Paying Inheritance Tax?

A
  • Ten equal annual instalments for certain assets;
  • Due on the anniversary of the first instalment;
  • With interest payable on the outstanding sum.

If such assets are sold, the outstanding tax is due immediately and the proceeds are availble to that end.

Qualifying assets include:

  • Timber;
  • Land and buildings;
  • A business or an interest in a business;
  • Farms or interest in a farming business
  • Company shares or securities giving the Deceased control;
  • Some unquoted shares or securities that did not give control because:
    • Payment cannot be made without undue hardship;
    • The tax attributable represents 20% or more of the total tax for which the PRs are liable, or
    • Their value is greater than £20,000 and represents at least 10% of the nominal value of all outstanding shares.
69
Q

What is the Chief Advantage of the Instalment Option?

A

Usually, the PR must pay IHT alongside IHT400 submission, whether or not the six-month deadline has passed (s.226 (1)(2) IHTA 1984). However, if instalment option is being used, when the PRs submit the IHT400 they only need to pay instalments that have become due by that date.

70
Q

When is an Estate Excepted from completing the IHT 400?

A

Low-Value Estate:

  • The Estate’s Gross Value falls below the BNRB and TNRB; therefore
  • No IHT is payable.

Exempt Estate:

  • The Estate’s Gross Value is £3m or less; but
  • Not IHT is payable; because
  • After deducting debts and applying the spouse and charity exemptions, the Taxable Estate falls below the BNRB and TNRB.

An Estate cannot be excepted if any of the following are true:

  • A claim for the RNRB is being made.
  • Foreign assets are worth more than £100,000.
  • The value of Specified Transfers exceeds £250,000.
  • The Deceased made a non-tax-exempt gift with a reservation of benefit, keeping the reservaton either until death or within 7 years of death.
  • The Estate includes either more than one trust interest or a single trust interest worth more than £250,000, neither of which pass to a Partner.
71
Q

What is an Estate’s Gross Value?

A
  • The Taxable Estate; plus
  • Specified Transfers, i.e. Chargeable Transfers of cash, land, shares, or chattels made 7 years before death; plus
  • Specified Exempt Transfers, i.e. exempt gifts to Spouses and Civil Partners or Charities.
72
Q
A

(FLK2) Wills and Estates (6 decks)

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