INHERITANCE TAX Flashcards
what is IHT
applies on gift of asset by an individual or trust, IHT does not apply on companies.
if an individual gifts an asset to another individual during lifetime, what will be the tax implication?
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
if an individual gifts an asset to TRUST during lifetime, what will be the tax implication?
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)
annual exemption
annual exemption of 3000 pounds is available against LIFETIME gifts.
it will automatically be deducted against first gift in a fiscal year.
unused annual allowance
can be carried forward uptill 1 year.
current AE will be used first and then b/f AE will be used
NIL RATE BAND
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.
if question is silent we will assume tax on lifetime gift is being paid by
donor
can taper relief and tax already paid result in refundable tax at death?
no
what is death estate
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
how is death estate distributed
according to will or rules of intestacy
is there any annual exemption on death estate
no
tax rate for death estate
40% tax rate
NRB of 325,000 will be available, reduced by last 7 yrs chargeable transfers
is there any taper relief on death estate?
no
pro forma for valuing death estate?
assets xxx
less: liabilities (xxx)
less: funeral exp (xxx)
=====================
net death estate xxx
less: exempt party (xxx)
transfers
=====================
chargeable death xxx
estate
how are assets valued at time of death
market value
how are shares and securities valued at time of death?
Lower of:
1) Quarter up rule:
Lowest quote + (Highest Quote-Lowest Quote/4)
2) Average bargain:
Lowest Bargain + Highest Bargain /2
how are mutual funds units valued at time of death?
Lowest bid price
how are debts treated at time of death?
all legal debts are deductable from death estate when calculating IHT
Gambling debts are not deductable from estate when calculating IHT ,
however if funds are remaining then gambling debt will be paid before beneficiaries receive anything
funeral expenses
deductable uptil reasonable extent
who are exempt parties in IHT
1) spouse or civil partner
2) UK registered charity
3) National institutions like national library or museums
4) Qualifying political party
if gift is made to exempt party during life or death
no IHT
transfer of nil rate band
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, when calculating death tax
Residence NRB
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
what if value of main residence is less than 175,000
then NRB will be restricted to the value of main residence
in what case will residence NRB not be available
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.
if after a person’s death, main residence goes to their spouse?
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)
what is resident property is changed after first spouse death? will 2nd R NRB be available on 2nd spouse death?
yes it will still be available
what if second spouse gets remarried, will carry forward Residence NRB be available to the third spouse?
NO. maximum two NRBs
transfer to direct descendants, or 1st NRB will be wasted.
yes 2nd NRB of second spouse will still be available.
in what scenario will IHT tax rate be reduced?
if 10% of baseline amount of death estate is donated to a UK registered charity, IHT rate will be reduced from 40% to 36%
what is base line amount?
Assets
Less Liabilities
Less funeral expenses
=Net death estate
Less exempt party transfers
=Chargeable DE
Chargeable DE
less ALL AVAILABLE NRBS
=Taxable DE
FOR BASELINE AMOUNT
add back to taxable DE:
Existing donation to charity
Residence NRB own and spouse
= BASE LINE AMOUNT
variation of will
-for tax purposes it is possible to change distribution done by a dead person through a document called “variation of will deed”
-this change is done for tax saving purpose
eg.
-additional donation to charity in order to qualify for reduced rate
-gift of main residence to direct residence
-to create generation gap (1 gen IHT will be saved) granparent to grandchild directly
when can variation of will be done
when will is made or even when there is no will and distribution is as per rules of intestacy
this means will can be changed irrespective of will made by deceased person
what are the conditions for variation of will
1- should be done within 2 years of death of donor
2- variation deed must be signed by all beneficiaries
3- variation deed should state that it is valid for CGT and IHT purpose
4- Person making variation deed should not charge any consideration for doing it.
benefits of lifetime gift
in order to encourage lifetime benefits, HMRC gives certain benefits:
1-annual exemption of 3000 pounds per year
2-no death tax after 7 yrs
3-taper relief if atleast 3 yrs have passed
4- PET, CLT value is locked and tax will be payable on locked value. if value increases, death tax will not be on increased value.
5- fall in value relief, if value falls after making lifetime gift, then tax will be paid on reduced market value.
6- in lifetime gifts, small gift exemption is also available of $250/donee/year. if excess than whole value will be taxab;e.
7- routine gift excemption (pocket money, bday gift etc)
8- marriage exemption is also available if gift is made at marriage of donee