Inheritance Tax Flashcards
What are the Current IHT Rates?
- Nil Band: 0%.
- Lifetime Rate: 20%.
- Death Rate: 40%.
What are the Types of IHT Trigger Events?
- Potentially Exempt Transfers (“PET”): Lifetime transfers of value that are not chargeable if the Transferor survives for seven years after the Transfer.
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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.
What is a Chargeable Transfer?
A non-exempt transfer of value made by an individual.
IHTA 1984 — s. 2(1).
What is a Transfer of Value?
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.
How does the Trigger Event determine Valuation?
- 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.
What is the Basic Nil Rate Band (“BNRB”) for Individuals?
£325,000. An individual’s surviving Spouse or Civil Partner can inherit the unused percentage thereof (“TNRB”).
What is the Residential Nil Rate Band (“RNRB”) for Individuals?
£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.
What is a Qualifying Residential Interest?
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.
What is a Residential Property Interest?
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.
What does it mean for the Qualifying Residential Interest to be Closely Inherited?
The Beneficiary recevies it:
- As a gift under the Will.
- By operation of survivorship.
- By operation of the Intestacy Rules.
What does it mean for the Qualifying Residential Interest to go to a Direct Descendent?
- 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.
Is RNRB available to all Estates?
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.
What is the Effect of Downsizing?
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.
How does an Estate qualify for Downsizing?
- 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.
When does the TNRB become available to a Survivor?
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.
Who makes the Claim for TNRB?
The Survivor’s PR.
They would do so in the Estate’s tax filings.
What is the Time Limit for Claiming TRB?
- Within two years of the end of the month of death; or
- Within three months of the PRs first acting.
Whicever is later.
What is the Tax Treatment of PETs?
- The Transfer is not chargeable when it is made.
- The Transfer becomes fully exempt if the Transferor survives seven years from the Transfer Date.
- If the Transferor dies within seven years of the Transfer Date, the Transfer becomes chargeable.
What is the Tax Treatment of LCTs?
- The Transfer is chargeable when it is made at 20%.
- If the Transferor survives seven years from the Transfer Date, there are no further taxes.
- If the Transferor dies within seven years of the Transfer Date, the Transfer will instead be taxed 40%.
What is the Principle of Cumulation?
All taxable transfers made in the seven years before death are summed before the Estate’s tax burden is calculated.
What is the Formula for Calculating IHT on Failed PETs and LCTs?
- Calculate the Cumulative Total.
- Identify the given Transfer’s value.
- Apply exemptions and reliefs.
- Deduct the BNRB and RNRB from the Cumulative Total.
- Calculate the given Transfer’s tax burden.
What is the Formula for Calculating IHT on Death?
- Calculate the Cumulative Total.
- Identify the assets included in the Taxable Estate.
- Calculate the Taxable Estate.
- Deduct debts and expenses.
- Apply reliefs and exemptions.
- Apply RNRB.
- Apply BNRB and calculate the final tax burden.
What is the Rule of Thumb for calculating the Taxable Estate?
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.
What is a Property Subject to a Reservation?
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.