INHERITANCE TAX

Question 1

what is IHT

Answer 1

applies on gift of asset by an individual or trust, IHT does not apply on companies.

Question 2

if an individual gifts an asset to another individual during lifetime, what will be the tax implication?

Answer 2

it will be called potentially exempt transfer (PET)

There will be no IHT during lifetime
however, if donor dies within 7 years after giving gift, then DEATH TAX will be payable of 40%

if donor dies after 7 years, no death tax

Question 3

if an individual gifts an asset to TRUST during lifetime, what will be the tax implication?

Answer 3

It will be called Chargeable lifetime transfer (CLT)

Tax implication will be:
-20% if donee is paying tax
-25% if donor is paying tax
-40% if donor dies within 7 years (Lifetime tax already paid will be adjustable)

Question 4

annual exemption

Answer 4

annual exemption of 3000 pounds is available against LIFETIME gifts.
it will automatically be deducted against first gift in a fiscal year.

Question 5

unused annual allowance

Answer 5

can be carried forward uptill 1 year.
current AE will be used first and then b/f AE will be used

Question 6

NIL RATE BAND

Answer 6

whenever IHT is calculated, a nil rate band of 325,000 is available.
it is available at lifetime or death.
it will be reduced by Chargeable transfers in last 7 years.

Question 7

TAPER RELIEF FOR DEATH TAX

Answer 7

GAP BETWEEN GIFT AND DEATH:
0-3 years= 0%
3-4 years= 20%
4-5 years= 40%
5-6 years= 60%
6-7 years= 80%
7+ years= 100%

Question 8

if question is silent we will assume tax on lifetime gift is being paid by

Answer 8

donor

Question 9

can taper relief and tax already paid result in refundable tax at death?

Answer 9

no

Question 10

what is death estate

Answer 10

net assets that were owned by a person at the time of death.
it is automatically treated as a gift at time of the person’s death

Question 11

how is death estate distributed

Answer 11

according to will or rules of intestacy

Question 12

is there any annual exemption on death estate

Answer 12

no

Question 13

tax rate for death estate

Answer 13

40% tax rate
NRB of 325,000 will be available, reduced by last 7 yrs chargeable transfers

Question 14

is there any taper relief on death estate?

Answer 14

no

Question 15

pro forma for valuing death estate?

Answer 15

assets xxx
less: liabilities (xxx)
less: funeral exp (xxx)
=====================
net death estate xxx
less: exempt party (xxx)
transfers
=====================
chargeable death xxx
estate

Question 16

how are assets valued at time of death

Answer 16

market value

Question 17

how are shares and securities valued at time of death?

Answer 17

Lower of:
1) Quarter up rule:
Lowest quote + (Highest Quote-Lowest Quote/4)

2) Average bargain:
Lowest Bargain + Highest Bargain /2

Question 18

how are mutual funds units valued at time of death?

Answer 18

Lowest bid price

Question 19

how are debts treated at time of death?

Answer 19

all legal debts are deductable from death estate.
Gambling debts are not deductable

Question 20

funeral expenses

Answer 20

deductable uptil reasonable extent

Question 21

who are exempt parties in IHT

Answer 21

1) spouse or civil partner
2) UK registered charity
3) National institutions like national library or museums
4) Qualifying political party

Question 22

if gift is made to exempt party during life or death

Answer 22

no IHT

Question 23

transfer of nil rate band

Answer 23

IF DEATH TAX NRB IS NOT COMPLETELY UTILISED,
the unused NRB will be transferred to the other spouse.

however it will not be available for lifetime gifts,
it will be available on death of other spouse

Question 24

Residence NRB

Answer 24

If a person gifts MAIN RESIDENCE to DIRECT DESCENDANTS via DEATH ESTATE, then additional NRB of 175,000 will be available. this is called residence NRB

Question 25

purpose of residence NRB

Answer 25

40% tax bachon k pas kahan se ayega
residence baich kar tax dena par raha tha
zulm

Question 26

what if value of main residence is less than 175,000

Answer 26

then NRB will be restricted to the value of main residence

Question 27

in what case will residence NRB not be available

Answer 27

if a person’s net death estate (before exempt party transfer) is above 2 million pounds, then residence NRB will diminish.
1 pound for every 2 pound excess.

Question 28

if after a person’s death, main residence goes to their spouse?

Answer 28

it will be an exempt transfer plus

when the other spouse dies and gives main residence to direct descendant, additional residence NRB of 175,000 will be available for them. (2 residence NRBs will be available on other spouse death)

Question 29

what is resident property is changed after first spouse death? will 2nd R NRB be available on 2nd spouse death?

Answer 29

yes it will still be available

Question 30

what if second spouse gets remarried, will carry forward Residence NRB be available to the third spouse?

Answer 30

NO. maximum two NRBs

transfer to direct descendants, or 1st NRB will be wasted.

yes 2nd NRB of second spouse will still be available.

Question 31

what if residence value is less than NRB

Answer 31

NRB will be restricted to that amount

Question 32

in what scenario will IHT tax rate be reduced?

Answer 32

if 10% of baseline amount of death estate is donated to a UK registered charity, IHT rate will be reduced from 40% to 36%