Inheritance Tax Flashcards
What is a deed of variation?
What is needed to effect a deed of Variation?/
Used to change a will after someone’s death.
Usually done for IHT purposes
The deed must refer to the will that is being varied
All beneficiaries must be over 18 and sane
Must be executed within two years of death
must contain statement that the variation is to have the effect for IHT as if the deceased made it.
Signed by all beneficiaries
If it increases any IHT due on estate EXECUTORS must sign too
No exchange of money
What responsibilities does and executor have?
Establish assets/liabilities of the estate
Calculate the net value of estate
Apply to HMRC for relevant IHT forms
Pay any IHT due
Obtain Grant of Probate
Gather assets
Pay any outstanding liabilities and taxes
Distribute the net proceeds of the estate according to the will
Act with due care and avoid conflicts of interest
What can you deduct from the value of an estate?
Reasonable funeral costs
Any loans repayable
Any Income Tax or CGT due
Any excluded property, ie Gilts, UTs and OEICS if non UK resident
If any assets sold after death at a lower price than probate value, then lower price used
What is the Nil Rate Band and Residence Nil Rate Band?
NRB = £325,000 per person
Can used unused spouses NRB as a %
RNRB = £100,000 per person
Can used unused spouses RNRB
Only useful if passing main residence to a direct descendent.
Can be used if downsized or gone into care too
Lost at a value of £1 for every £ of estate value over 2m
What is quick succession relief and how does it work?
Gives relief where property in the deceased’s estate has passed to them and has already attracted IHT.
Its is a tax reducer - UP TO 5 YEARS
Tax charged on death overall is reduced by a % of IHT paid on earlier transfer
Formula
Tax paid on 1st transfer x (net transfer/gross transfer) x %
% = 0-1 Year is 100% 1-2 years is 80% 2-3 years is 60% 3-4 years is 40% 4-5 years is 20%
How do you treat a failed Potentially Exempt Transfer?
REDUCE THE VALUE OF THE GIFT BY £6,000 GIFT ALLOWANCES FIRST!!!!
Check any other PETS within 7 years from the last PET
Add these up and set against the Nil Rate Band (£325k)
Value of these PETS will have used up some of the NRB
Anything over the NRB will be taxable to IHT
Although taper relief can be applied as a reducer to the IHT due on those PETS
What are some examples of a Chargeable Lifetime Transfer (CLT)?
Transfer into a discretionary trust
Transfer into an IIP after 21st March 2006
Set against NRB at the time, any excess is chargeable to IHT at 20% of excess immediately
If the donor pays this then need to gross it up
If the donor dies with 7 years then 40% tax is dues on the new value of the transfer over the NRB, LESS any tax already paid.
Need to look back for other CLTs and PETs that have already used some NRB
What are some examples of Potentially Exempt Transfers (PETs)?
Outright gifts
Transfers to a bare or absolute trust
Will become a chargeable transfer if death within 7 years of gift.
How is IHT taper relief applied?
It is a tax reducer on the tax charge applied to a Chargeable Transfer
The tax charge is calculated first at 40% of the value above the Nil Rate Band less any tax already paid
If they have dies within 3 years of the gift then 100% of the tax is due.
If death between 3-4 years then 80% tax due
Between 4-5 years then 60%
Between 5-6 years then 40%
Between 6-7 years then 20%
What is exempt from IHT?
Charitable donations
£3,000 annual gifts (x 2 as can be carried forward 1 year)
£5,000 wedding gift to child
£2,500 wedding gift to grandchild
£1,000 wedding gift to others
Small gifts of £250 to whoever for whatever
Normal gifts out of INCOME
What do gifts out of income need to be to satisfy the rules?
Out of income not capital
Intention to make regular gifts
Must not affect standard of living
