Inheritance Tax Flashcards
re: lifetime transfers
what is meant by liability? who is liable?
- the person(s) liable to pay HMRC the IHT (e.g. the PRs)
Statutory rules cannot be changed by express provision in the will
re: lifetime transfers
what is meant by burden?
the person(s) who ultimately bears the costs
Statutory rules on burden can be changed by express provision in the will
re: lifetime transfers
when does IHT liability arise on transfers made in D’s lifetime?
o Potentially exempt transfers; and
o Lifetime chargeable transfers
re: lifetime transfers
what is a potential exempt transfer?
- a gift by D to another person during D’s life or into a disabled trust
re: lifetime transfers
when does a PET become chargeable?
A PET is only chargeable to IHT if D dies within 7 years of making the gift i.e. if D lives for more than 7 years after making the PET, it is fully exempt
re: lifetime transfers
what is a lifetime chargeable transfer?
any transfer made during D’s life that isn’t a PET i.e. transfers to other types of trust after 22 March 2006 and transfers to companies
re: lifetime transfers
when is an LCT chargeable?
o LCTs are automatically chargeable. They are not like PETs which only become chargeable to IHT if they fail (i.e. D dies within 7 years of transfer)
re: lifetime transfers
what are the steps for this IHT calculation?
Stage 1 – identify the transfer of value
Stage 2 – find the value transferred
Stage 3 – apply exemptions and reliefs
re: lifetime transfers
what is meant by transfer for value?
any disposition made in D’s lifetime which reduces the value of the transferor’s estate i.e. a gift or sale at undervalue reduces the value, selling something at market value or above does not
re: lifetime transfers
when is a transfer for value not included?
A transfer for value is not included if it is for:
o The maintenance, education or training of the transferor’s child which is under the age of 18 or still in full-time education or training; or
o Maintenance of a dependent relative
re: lifetime transfers
explain ‘Stage 2 – find the value transferred’
i.e. the loss in value to the estate caused by the transfer
Usually the loss is the market value of the transferred property, however if the transferred property was part of a collection and only part of the collection was transferred (thereby increasing the loss), use this formula:
MV of collection minus MV of remaining collection = loss to estate
Related property rules also apply (see above)
re: lifetime transfers
what are the exemptions/reliefs?
Order of exemptions/reliefs:
1. Spouse/CP and charity exemption
2. BPR & APR
3. Lifetime exemptions
re: lifetime transfers
explain ‘spouse/CP and charity exemption’
- Same application as with transfers on death
- NB: it applies even if transferor dies within 7 years of the gift.
re: lifetime transfers
explain ‘BPR and APR’ reliefs
Same application as with transfers on death. However:
o Transferor dies within 7 years of gift > BPR only available if the transferee owns the RBV at D’s DOD (or their own if they predeceased D)
o Transferor dies more than 7 years after gift > BPR available
re: lifetime transfers
what is the annual exemption and how can the annual exemption be used?
- £3k per tax year is exempt from IHT
- Can be one or multiple smaller transactions to one or more people
- Any unused exemption can be carried forward into the next tax year but must be used within the next tax year (so can be a max of £6k)
re: lifetime transfers
what are the lifetime exemptions?
- annual exemption
- small gifts
- normal expenditure out of normal income
- gifts in consideration of marriage
re: lifetime transfers
explain small gifts
- NB: this exemption applies to PETs only (not LCTs)
- Gifts not exceeding £250 in total value to a donee are exempt from IHT
- There can be any number of donees, the limit applies to each donee
- If the gifts to a particular donee exceed £250, the exemption is lost (i.e. all the money paid to them becomes chargeable)
- This cannot be carried over to the next tax year
re: lifetime transfers
what does small gifts apply to?
PETs only, not LCTs
re: lifetime transfers
what happens if a small gift exceeds the limit?
- If the gifts to a particular donee exceed £250, the exemption is lost (i.e. all the money paid to them becomes chargeable)
re: lifetime transfers
explain ‘normal expenditure out of normal income’
give an example
A transfer is exempt if it can be shown that:
o It was made as part of their normal expenditure:
o It was made from their income; and
o The transferor had sufficient income to maintain their usual standard of living after these payments had been made
- Common example - parent to child for university living expenses
re: lifetime transfers
how many recipients can receive a small gift?
- There can be any number of donees, the £250 annual limit applies to each donee
re: lifetime transfers
explain gifts in consideration of marriage
These gifts on marriage are exempt. Any amount above this is chargeable:
o £5k from parent;
o £2.5k from another family member;
o £1k all other cases
re: lifetime transfers
if the transfer is a PET, what happens at stage 3?
- If it is a PET, there is no IHT liability at the time of the transfer, and it will be fully exempt if D survives for 7 years after the transfer.
- Therefore, the remaining net value can be deducted if D is still alive
- The net value of the PET calculated at the time of the transfer, is the figure that is used if the PET becomes chargeable in the future
re: lifetime transfers
explain stage 4 - calculate tax at the appropriate rate
- At this stage, we are looking at IHT at the time the transfer is made and D is alive. As above, there is no IHT charge on a PET whilst D is alive, so this is looking at IHT payable at the time of transfer on a LCT only.
re: lifetime transfers
what are the tax rates?
£0 - £325k @ 0%
20% on anything above
re: lifetime transfers
explain how tax on LCTs is calculated
give an example
The total of any LCTs made in the 7 years before the current transfer are culminated and then deducted from the NRB first. The remainder of the NRB can be used for the LCT and any excess will be taxed at 20%.
NB: if a transfer in the culmination period was a PET, it is not included in the calculation. This is because it is not yet chargeable.
- May 2023 – gift of £50k to trust (an LCT). Any other LCTs in the 7 years prior (i.e. from May 2016)?
- Yes > May 2019 & May 2020 - £140k each
- Culminative total of LCTs = £280k - £325k = £45k (remaining NRB)
- £45k NRB left for current gift > £45k @ 0% + £5k @ 20% = £1k IHT to pay
re: lifetime transfers
who is liable to pay IHT?
- Transferor is liable, but either the transferor or trustees can pay IHT
re: lifetime transfers
why might the trust pay IHT?
- Common for the trust to pay IHT. This is because there is a lesser IHT liability.
- The trust will pay IHT on the value of the property only, but IHT is paid from the trust fund so there will be less money for Bs
re: lifetime transfers
what is the effect of the transferor pays IHT?
- If the transferor pays, the IHT is payable on the value transferred, this is the loss to the estate cause by the gift (i.e. value of the asset plus the sum of IHT)
re: lifetime transfers
explain payable IHT when the transferor pays and when the estate pays
Transferor pays grossing up calculation for an LCT:
o Value of LCT x (100 / 80) = gross value transferred
o Gross value transferred @ 20% = IHT payable
Trustees pay loss to estate @ 20% = IHT
re: lifetime transfers
if the LCT was made after 5 April & before 1 October, when is IHT due?
IHT due 30 April the next year
re: lifetime transfers
if the LCT was made after 30 September & before 6 April, when is IHT payable?
IHT at the end of the 6 months after the LCT was made
re: lifetime transfers - death
what is the effect of lifetime transfers on death?
If the D has died within 7 years of making a PET and/or LCT, PRs will need to undertake stages to confirm the IHT liability
o It is important they check whether the BPR exemption still applies
o Important to remember where an LCT/PET is captured by a culmination period, if the transfer itself was 7 years before death, an IHT calculation doesn’t need to be done for that transfer, but it is included for culmination
The NRB available for the death estate will be reduced if there have been any chargeable lifetime transfers
PETs should always be calculated before LCTs
re: lifetime transfers on death
how do you approach a PET?
start with the earliest PET within the 7 years prior to death and apply the NRB against the earliest first
(each chargeable transfer has its own culmination period. The culmination value is the total of the relevant transfers before the transfer in question)
- Calculate the cumulative total for the PET being assessed, this will include:
o Any LCTs made 7 years before the PET being assessed (the effect is that this can capture LCTs made up to 14 years before the DOD)
o Any PETs within the 7 years before death that took place before the PET - Minus the culminative total from the NRB (or remaining NRB), this gives you the available NRB for the PET being assessed.
- The tax rate for any value above the NRB is 40% (unless taper relief applies)
* IHT is payable by the person who received the gift in D’s lifetime.
re: lifetime transfers on death
how do you approach an LCT?
Any LCTs must be recalculated if D dies within 7 years of making it. This is because PETs may now be chargeable, thereby reducing the NRB.
- Calculate the cumulative total for the LCT being assessed, this will include:
o Any LCTs made 7 years before the LCT being assessed (the effect is that this can capture LCTs made up to 14 years before the DOD)
o Any PETs within the 7 years before death that took place before the LCT - Minus the culminative total from the NRB (or remaining NRB), this gives you the available NRB for the LCT being assessed.
- The tax rate for any value above the NRB is the lower of either the rate at the time of transfer or DOD (36% charity tax rate n/a)
o NB: this does not mean they are taxed at the LCT lifetime rate (i.e. 20%). It means they are either taxed at the current death rate (i.e. 40%) or, the death rate at the time of the transfer, if this was lower.
- Credit is applied for IHT already paid on the LCT, but if the recalculated bill is lower, a tax refund will not be given.
re: lifetime transfers on death
what is tapering relief?
this reduced tax payable depending on when the transfer was made before death
re: lifetime transfers on death
how is tapering relief applied?
the % is applied to the assessed IHT liability
re: lifetime transfers on death
if the lifetime transfer was made 3 - 4 years before death, what % of tax is payable?
80% of death charge
re: lifetime transfers on death
if the lifetime transfer was made 4 - 5 years before death, what % of tax is payable?
60% of death charge
re: lifetime transfers on death
if the lifetime transfer was made 5 - 6 years before death, what % of tax is payable?
40% of death charge
re: lifetime transfers on death
if the lifetime transfer was made 6 - 7 years before death, what % of tax is payable?
20% of death charge
re: lifetime transfers on death
to what extent are PRs liable if the transferee does not pay IHT?
- PRs are only liable to the extent of the assets in the estate (or the assets they would have received, but for their neglect or default)
o PRs cannot escape liability on the grounds they have distributed the estate
re: lifetime transfers on death
who has IHT liability?
a PET becomes chargeable / more tax is payable on an LCT on death, the transferee is liable but the PRs become liable if it is unpaid after 12 months
re: death estate
who pays the tax?
PRs
re: death estate
give an overview of the stages?
Stage 1 – identify the transfer of value
Stage 2 – find the value transferred
Stage 3 – apply exemptions and reliefs
Stage 4 – calculate tax at the appropriate rate
re: death estate
explain ‘Stage 1 – identify the transfer of value’
- IHT is payable on death based on the value of the estate
re: death estate
what is included in the definition of ‘estate’
all property D was beneficially entitled to immediately before death (except excluded property).
This includes property:
o Passing under a will/IR;
o Passing outside a will/IR (i.e. interests in property passing by survivorship)
i.e. property held as JT, joint bank accounts
o Included by statute (i.e. some trust property and reservation property)
re: death estate
what property is excluded from the definition of ‘estate’?
property not part of the estate for IHT purposes e.g., reversionary interests (this is a future interest in a trust i.e. remaindermen)
re: death estate
what is property that D is not commonly beneficially entitled to
o Life assurance policy written in trust for a named B; and
o Discretionary lump sum payment from a pension fund to D’s family
re: death estate
when will trust property form part of D’s estate?
- Relevant where D had an interest in possession (IIP)
- If D’s IIP is ‘qualifying’ (QIIP), the trust capital is treated as part of B’s estate
re: death estate
if there is an IIP, who pays the IHT on this?
The IHT is payable from the trust fund
re: death estate
what are the requirements to be a qualifying IIP?
The requirements to be a ‘qualifying’ IIP depend on when the interest arose:
o Before 22 March 2006 D’s IIP will be qualifying if D was entitled to trust income or enjoy the property in another way (i.e. living in it) and Ts had no discretion over the interest
o After 22 March 2006 D’s IIP will be qualifying if it was an ‘immediate post-death interest (IPDI) (i.e. D’s IIP arose on death of S under their will or IR)
re: death estate
what is meant by ‘property subject to reversion’?
- If D gave away property during their lifetime but did not transfer ‘possession and enjoyment’ or was not entirely excluded from using it, it will be included in their estate for IHT purposes
re: death estate
who will pay IHT where the property is subject to reversion?
- The IHT is payable by the donee
re: death estate
what is the calculation to work out the net value of the estate?
aggregate probate values minus liabilities = net value of estate
re: death estate
what does stage 2 involve?
working out the net value of the estate
re: death estate - stage 2
what are liabilities?
o Liabilities are debts and expenses (inc. funeral expenses)
re: death estate - stage 2
what is the basic valuation principle?
assets will be valued at the price they might reasonably fetch on open market immediately before death.
there are additional valuation principles
re: death estate - stage 2
what is the ‘probate value’?
The final agreed value is the ‘probate value’.
NB: some value may be negotiated with HMRC
re: death estate - stage 2
what are the additional valuation principles?
- s171 IHTA
- jointly owned land
- related property rules
- valuing quotes shares
re: death estate - stage 2
explain s171 IHTA 1984
give an example
If death increases/decreases the value, this must be taken into account
i.e. D insures their life for £50k. It is not written in trust, so it belongs to D. The value of the policy before death is the surrender value (i.e. the value if D surrendered his rights back to the insurance company). This is less than its maturity value (i.e. the amount paid when the policy matures - £50k on death). Therefore, £50k is used for IHT purposes.
re: death estate - stage 2
explain jointly owned land
when does this not apply?
A discount of 10% for commercial property & 15% for residential property is applied to D’s share of jointly owned property
Does not apply if owners are married. The related property rules would apply
re: death estate - stage 2
what are the related property rules?
Used to value an estate asset that is ‘related’ to other property held by S/CP
re: death estate - stage 2
what is the procedure under the related property rules?
- Ascertain market value of D’s asset
- Ascertain the MV if D and S/CP’s assets were sold together
- Divide this by the number of assets = apportionment value
RPR only applies if the apportionment value is more than the individual MV
The apportionment value is applied to S/CP’s asset for future tax purposes
re: death estate - stage 2
what is the purpose of the related property rules?
The purpose of RPR is to prevent tax avoidance. Normally a gift to S/CP would be an exempt transfer. D could try to transfer one part of a collection to avoid paying as much IHT on it. This rule prevents that.
re: death estate - stage 2
explain valuing quotes shares
Valued based on the Stock Exchange Daily List at the DOD (or nearest trading day). This states two prices.
Calculation for IHT:
1. Higher price – lower price = difference
2. difference x 0.25 = [X]
3. [X] + lower price = value per share for IHT purposes
re: death estate - stage 2
what is the calculating for valuing quotes shares?
Calculation for IHT:
1. Higher price – lower price = difference
2. difference x 0.25 = [X]
3. [X] + lower price = value per share for IHT purposes
re: death estate - stage 3
how do you calculate the estate value for IHT?
sum of exemptions & reliefs minus net value of the estate = estate value for IHT
re: death estate
what happens at stage 3?
apply exemptions and reliefs to get the estate value
re: death estate
what is important to remember about exemptions and reliefs?
- Exemptions are applied before reliefs. This is because an exemption could make an asset wholly exempt (i.e. if it passes to a S/CP, reliefs are academic)
- PRs cannot double claim i.e. if BPR is claimed on an asset, they can’t also claim APR for that same value of the asset, but if only one part of the value is reduced by a relief, they might be able to reduce the value of the outstanding portion under the other relief if applicable
re: death estate
what are the exemptions and reliefs?
- spouse/civil partnership
- charity
- BPR
- APR
re: death estate
explain spouse/CP exemption
- Assets which pass to D’s S/CP by will, IR or survivorship are exempt from IHT
o Not applicable to cohabitants, even if they are named in the will - A QIIP which passes to their S/CP on death will be exempt from IHT
re: death estate
how is the spouse/CP exemption limited?
If D is domiciled in the UK and S/CP is not, the exemption is limited to £325k unless the S/CP elects to be treated as UK-domiciled for IHT purposes
re: death estate
explain the charity exemption
- Property passing to a charity, certain national bodes, bodies for public benefit (i.e. museums, art galleries) and political parties are exempt from IHT
re: death estate
briefly, when is BPR available?
- Relief is available on ‘relevant business property’ (RBP)
- Transferor need not transfer all of their interest in the RBP for BPR to apply
re: death estate
what are the BPR rates and the associate relevant business property?
100% reduction in transfer value of:
o A business or an interest in a business (inc. partnerships)
o Unquoted company shares (i.e. not listed on a recognised stock exchange)
50% reduction in transfer value of:
o Quoted shares if they gave D voting control of the company immediately before the transfer
o Land, buildings and machinery personally owned by D but used for business purposes by a partnership D was a partner of or a company (quoted and unquoted) D has voting control over
re: death estate - BPR
what is voting control?
can exercise over 50% of the votes. D’s and a S/CP’s shareholding can be combined to satisfy this requirement.
re: death estate
what are the time limits for BPR?
Transferor must have owned the RPB for at least 2 yrs before the transfer
If they sold the RBP and used the sale proceeds to buy new RPB, BPR can be used on the new RPB if there is a combined ownership of 2+ years
Where the transferor inherited the RPB from a deceased S/CP, they are deemed to have owned it from the date the deceased S/CP acquired it
n/a to lifetime transfers between S/CP
re: death estate
briefly, what is APR?
Agricultural Property Relief - the agricultural value (AV) of agricultural property can be reduced
re: death estate
when will BPR not apply and why?
If the RPB is subject to a binding contract for sale, BPR is not available
o This is because the transferor’s interest is then the sale proceeds, and cash is not RPB
o i.e. SH agreement states that if a SH dies, the SHs’ PR will sell the shares to the remaining SHs BPR not available on these shares.
re: death estate
what is the agricultural value?
o AV = the value if it could not be used for anything else other than agriculture
- The AV is often less than the market value. APR applies to AV only. Any value above the AV will not qualify for APR, but may qualify for BPR.
re: death estate
what is agricultural property?
o Agricultural property = land used to grow crops and rear animals and farm buildings (inc. farm houses) on working farms
re: death estate
what is not agricultural property?
o Not agricultural property = plant and machinery, harvested crops, livestock
re: death estate
when is APR available?
APR available on property used for agricultural purposes which has been:
o Occupied by the transferor for 2 years prior to the date of transfer; or
o Owned by the transferor for 7 years prior to transfer, but it has been occupied by someone else
re: death estate
what are the APR rates?
100% reduction in AV where:
o Transferor had a right to vacant possession immediately before transfer
o If the property is let, the agreement started on or after 1 September 1995
50% reduction in AV in all other cases
re: death estate
when is APR not available?
- Any agricultural property subject to binding contract doesn’t attract APR
re: death estate
who pays IHT?
- The tax is payable by PRs
re: death estate
when will a spouse/CP inherit NRB?
- Where D died on or after 9 October 2007, they will inherit any unused NRB of their deceased S/CP
re: death estate
how is the NRB applied if there have been other chargeable transfers?
If there have been any chargeable transfers, the net aggregate total is applied to the NRB first, i.e.:
o NRB is £325k. Net cumulative total of chargeable transfers is £175k.
o £325k - £175k = £150k of NRB left. This means £150k of the estate is taxed at 0%. Anything above is taxed at 40%.
re: death estate
what is the current NRB?
£325k (i.e. £0 - £325k @ 0%, anything above @ 40%)
Or 36% if at least 10% of D’s net estate is going to charity
re: death estate
what are the requirements for RNRB?
o D died after 6 April 2017
o D owned a qualifying residential interest i.e. an interest in a dwelling house which has been D’s residence at any time and forms part of their estate
o Issue inc. step-children, children D was the guardian of and foster children
re: death estate - RNRB
explain ‘D owned a qualifying residential interest’
o i.e. an interest in a dwelling house which has been D’s residence at any time and forms part of their estate
Need not be D’s main residence but they must have lived in it for a period of time during ownership
re: death estate - RNRB
explain ‘the interest is inherited by either…’
The interest is inherited by either:
D’s issue either outright (i.e. as a gift) or under a IPDI, disabled person, or bereaved person trust; or
* NB: if the interest passes under any other type of trust no RNRB.
An issue’s current spouse/CP; or
An issue’s widow(er)/surviving CP (unless they have remarried or formed a new CP before D’s death)
re: death estate - RNRB
what is the current RNRB?
- RNRB = £175k
This is in addition to NRB
re: death estate - RNRB
what are the limitations?
o This applies up to the value of D’s residence and only to one property
o it will be reduced if the value of the estate is over £2m
re: death estate - RNRB
what is the calculation where the RNRB is to be reduced?
If the estate is over £2m, the RNRB is reduced by £1 for every £2 over £2m:
o (Value of estate - £2m) / 2 = [X] £175k – [X] = adjusted RNRB
re: death estate
when will RNRB be inherited?
A S/CP will inherit any unused RNRB from their deceased S/CP (even if the deceased S/CP died before 6 April 2017)
re: death estate
can RNRB be claimed even if the property has been sold?
If D downsized/sold the property after 8 July 2015, RNRB can still be claimed:
o If the property would have qualified for RNRB; and
o The replacement property or assets of equivalent value (where the property has been sold) is inherited by issue
re: death estate
what is the estate rate?
average rate of tax applicable on a specific item
re: death estate
when is the estate rate used?
- Used when PRs need to know the IHT payable for specific property in the estate i.e. land by instalments, a gift ‘subject to tax’
re: death estate
what is the estate rate calculation?
- (total tax bill / total chargeable estate) x 100 = estate rate
o The estate rate is the multiplied by the value of the asset to work out IHT
re: death estate
can the will alter liability?
no
re: death estate
who is liable to pay if the property is subject to a reservation?
Where property is subject to reservation (see above), the donee is liable to pay IHT. However, if they do not do so in 12 months the PRs must pay.
re: death estate - liability
what is the position regarding settled property?
i.e. property in trust immediately before death) - trustees are liable for IHT for that property
o PRs will need to work out the full IHT liability and then use the estate rate calculation to workout the portion of IHT the trustees are liable to pay
o NB: where D had a QIIP, the whole trust fund is treated as part of their estate, and so trustees will need to pay IHT on the whole lot.
o Any person whom the trust property vests in (e.g. a remainderman) is concurrently liable (i.e. if the trustees transfer the trust property to a B before tax is paid, HMRC can recover the tax from them)
re: death estate - liability
what is the position regarding non-settled property?
PRs are liable to pay IHT on any property which is not trust property immediately before death (i.e. inc. property passing under a will/IR and property passing by survivorship)
Liability is limited to the value of assets PRs have received in the estate (or would have, but for their own negligence or default)
HMRC can also claim IHT from a B who has received the property and a surviving joint tenant to the property (although this is uncommon)
re: death estate
who has the burden of IHT?
- If the will is silent, IHT on property which vests in the PRs (i.e. property passing under the will/IR) is payable as a testamentary expense. Any surviving JT is liable to pay IHT on joint property passing by survivorship
- The will can alter this position
