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AF1 2018/19 > Inheritance Tax > Flashcards

Inheritance Tax Flashcards

1
Q

When is IHT payable?

A

Payable on certain transfers of value which are :-

  • Value of someone’s estate on death
  • Certain transfers during someone’s lifetime
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2
Q

What are the 2 rates payable of IHT on lifetime transfers?

A

0% when covered by a nil rate band

20%

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3
Q

What are the 3 rates of IHT payable on an individuals estate?

A

O% - when covered by a nil rate band
36% ( a reduced rate where 10% or more of net estate is left to charity)
40%

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4
Q

When did the transfer of the unused nil rate band between spouse or civil Partner come into play?

A

October 2007
Calculated on a proportionate basis
Second death is after October 2007 but first death can be before this
Maximum is only 2 nil rate bands

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5
Q

Is IHT a cumulative tax?

A

Yes

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6
Q

How is the nil rate band applied when it comes to chargeable transfers?

A

It is applied in date order

It begins with the earliest chargeable transfer in the last 7 years

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7
Q

What is the situation if the transferor (donor) is UK domicile in respect to IHT?

A

They will pay IHT on all their assets whether they are in the UK or held worldwide

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8
Q

What is the IHT situation if someone is deemed domicile?

A

Deemed domicile is where they have been resident in the UK for at least 17 out of the previous 20 years
IHT will apply to their assets whether they are in the UK or held worldwide

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9
Q

What is the IHT situation where some is domiciled outside of the UK?

A

They will only pay IHT on any property situated in the UK will be chargeable

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10
Q

What can someone who is domiciled outside of the UK and they have a UK domiciled spouse in respect to IHT?

A

They can elect to be treated as UK domiciled for IHT purposes
The advantage is that they will be entitled to an exemption but will be liable to IHT on their assets in the UK and worldwide

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11
Q

For a lifetime transfer to be considered then what also must be considered?

A

That there must be an intention of making a gift

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12
Q

Is maintenance by court order a transfer of value?

A

No as this is not considered a gift as there is no intention - it is something that needs to be done

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13
Q

Is any sale at arms length considered to be a transfer of value for IHT purposes?

A

No

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14
Q

How can a transfer of value be measured from an IHT perspective?

A

This is a reduction in the value of the estate
Eg if someone owns a pair of vases worth £20K, gives one vase to a relative which is worth £6000. The transfer of value is £14k as this is the reduction of the value of the estate (the estate still holds the other vase worth £6000)

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15
Q

Is there a transfer of value of the transaction does not reduce the value of the estate?

A

No

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16
Q

What are the 5 classifications of a lifetime transfer?

A
  • Exempt
  • Gift with a reservation of benefit
  • Potentially exempt transfer (PET)
  • Chargeable lifetime transfer - not taxable
  • Chargeable lifetime transfer - taxable
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17
Q

Name some exempt transfers? (8)

A
  • Transfers between spouse and civil partners - only up to £325000 where the recipient is not domiciled in the UK
  • Gifts to charities and political parties
  • Gifts for the national benefit eg to libraries and museums
  • Annual exemption of £3000 - this can be carried forward for 1 year
  • Gifts for marriage - £5000 from parent, £2500 from grand parent, great grandparent, prospective spouse, civil partner, £1000 for any other person
  • Certain gifts for maintenance and education
  • Small gifts of £250 - this can be any number provided that they are to different recipients
  • Lifetime gifts from normal expenditure from surplus income (payments do not need to be equal in size)
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18
Q

What are gifts with reservation of benefit?

A

This is where an individual makes a gift but continues to take a benefit from it eg giving away a house and continuing to live in it

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19
Q

How can the gift of reservation of benefit rules be avoided?

A

By paying full commercial rent for any period of employment

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20
Q

What is pre-owned assets tax (POAT)?

A

This is an annual income tax charge
Introduced in Finance Act 2004
Took effect on 6th April 2005 but covers from 17th March 1986 any assets owned which are then disposed of

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21
Q

What does POAT cover?

A

Land - where someone has transferred property and continue to live in it, income tax is based on the equivalent market rentals
Household and chattels (personal goods) - still being used by the transferor after transfer - charged as 3% of capital value
Intangible assets eg shares and insurance polices

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22
Q

At what value is POAT not paid as the asset is considered to be exempt?

A

Any asset under £5000

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23
Q

How can you elect for POAT not to be paid?

A

By paying full market rent or elect for the assets to be subject to IHT on death i.e. elect for it to be a gift with reservation of benefit

24
Q

Name 3 examples of PETs

A

A lifetime transfer made to:-

  • Another individual
  • A bare trust
  • A disabled trust
25
Q

When is IHT payable in respect to a PET?

A

IHT is not paid at the outset however if the transferor dies within 7 years, then the PET has failed and it becomes chargeable.
The amount to pay can be reduced by taper relief

26
Q

What does taper relief apply to?

A

It applies to the tax on the PET and not the transfer

No tax no taper!!!!

27
Q

What are the 3 transfers into trusts which are considered as CLT (Chargeable Lifetime transfers)?

A

Interest in possession trust - if made on or after 22nd March 2006
Discretionary Trust
Accumulation and Maintenance Trusts created on or after March 22nd 2006
(These are sometimes referred to as relevant property trusts)

28
Q

Is a chargeable lifetime transfer immediately chargeable to IHT?

A

No - not if over a 7 year period it falls within the nil rate band then there is no immediate charge. If this were over the nil rate band then the excess would be charged immediately at 20%.

29
Q

What is the 14 year rule?

A

If someone lives for 7 years or more after making a PET then it will become exempt however if someone makes a CLT, even if more than 7 years pass before death then this can effect transfers in the next 7 years.

30
Q

Name 4 exempt IHT transfers on death?

A
  • Transfers between spouse and civil Partners (Unlimited if UK resident, capped at £325000 if recipient is not UK domiciled)
  • Gifts to charities
  • Gifts for the national benefit eg gifts to museums/libraries
  • Estates of members of the armed forces who die on active service
31
Q

Can you use an annual exemption on death?

A

No this can only be used against lifetime transfers

32
Q

What do the executors and the administrators do when they value the estate?

A
  • add the value of assets and include any life policies not in trust
  • deduct reasonable funeral expenses
  • review transfers made before death
33
Q

What is the rule regarding simultaneous deaths?

A

Where it can not be determined who died first then it is considered that they both died at the same time to avoid a double charge
(Under general law, the older is presumed to have died first)

34
Q

What happens with joint assets?

A

Regardless of what the will states, on death, ownership of the asset goes to the survivor and will be classed as a transfer of value.

35
Q

What are the rules around business assets and business relief? (5)

A
  • Held for a minimum of 2 years ( a lesser period is acceptable if these have been inherited on death of a spouse)
  • Relief is given for 100% unincorporated businesses and shares in inquoted companies
  • Relief is 50% for business assets and controlling shareholdings in quoted companies
  • Only given to qualifying companies
  • Assets must have been required for business purposes at time of death
36
Q

What are the rules around agricultural relief?

A
  • Held for agricultural purposes of 2 years (7 years if transferor is a landlord) - a lesser period is acceptable if it has been inherited by a spouse
  • Includes growing crops and buildings - not animals and equipment
  • Needs to be a genuine farming business
  • Only applies to the agricultural value and not any additional extras ie if it is a attractive outhouse as a second home this would not give agricultural relief
37
Q

What is woodlands relief? (IHT)

A

*100% relief on transfers on death of growing timber (applies to the timber and not the land)

38
Q

What is loss on sale relief in respect to IHT?

A

Where the personal representatives sell the assets for less than probate value , they can reclaim the part of the IHT that has been paid. This happens with sales of shares within 12 months and sale of land within 4 years

39
Q

What is quick succession relief? (3)

A
  • Where IHT is paid and the individual dies within 5 years
  • Relief reduces the payment of IHT on second death
  • It is reduced by 20% on each year on the tax paid on the earlier death
40
Q

How do you calculate quick sucession relief?

A

*Calculate the tax on the deceased’s estate as normal
*Apply the credit for QSR which is
Tax paid on 1st transfer x net/gross transfer x % reduction

41
Q

What is the rule regarding transfers to charity?

A

*reduced rate of 36%
*10% or more needs to be left to charity or community amateur sports club of net estate
Net estate is estate after all exemptions, reliefs and nil rate bands - not the charity transfer though

42
Q

Can expenses incurred by the recipient of the transfer by deducted from the value of the transfer for IHT?

A

Yes

43
Q

Who must report the transfer to HMRC with a chargeable lifetime transfer?

A

The transferor

44
Q

Who must report a PET to HMRC and when?

A

The recipient on death (not at time of transfer)

45
Q

Who is responsible for reporting an estate on death to HMRC?

A

This is the responsibility of the personal representatives to list and report the recipients of PETS that have been chargeable and CLTS were more tax is payable.

46
Q

When is IHT payable with an estate?

A

Six months after the end of the month of the death

47
Q

When is IHT payable with a lifetime transfer?

A
  • If between 6th April and 30th September, the tax is due on the 30th April on the following year
  • if between 1st October and 5th April - tax is due 6 months after the end of the month of the transfer
48
Q

In what circumstances can IHT be made by instalments equally over 10 years? (4)

A
  • Land and buildings
  • Controlling interest in a company
  • Unquoted shares where value exceeds £20000 and shares are at least 10% of nominal capital
  • net value of a business
49
Q

In what situations may it be possible to pay IHT direct from the deceased estates? (3)

A
  • If there is cash in the deceased’s building/bank account this can be transferred directly to HMRC if the bank is a member of the direct payments scheme - this cannot be used for joint accounts.
  • A transfer of UK gilts which are in the deceased’s sole name
  • A transfer of NS & I investments in the deceased name
50
Q

What is the effective tax charge if a settlor wishes to pay the IHT on a transfer into a trust?

A

This is effectively a 25% tax charge

51
Q

How do you determine with the interest in possession trust the rules on whether it is considered a PET or a CLT?

A
  • With an interest in possession trust, if the transfer was made before March 22nd 2006 and the pre-March beneficiaries remain the same or were changed before 6th October 2008 then this is a PET
  • With an interest in possession trust, if the trust was created before 22nd March 2006 whose beneficiaries were changed on or after 6th October 2008
52
Q

How is the periodic charge on a relevant property trust calculated?

A
  • Excess over the nil rate band
  • Rate is determined by multiplying the hypothetical rate paid on the transfer by the settlor of 30%.
  • As the maximum charge by settlor is 20% on a CLT then the maximum period charge is 6% (20% x 30%)
  • The effective rate is then the maximum charge/trust value x 100
53
Q

Do bare trusts and trusts for disabled/vulnerable persons suffer period and exit charges?

A

No as these are not relevant property trusts

54
Q

Are there any exit and period charges for a minor?

A

No - not if this is taken at 18.

55
Q

What happens with a accumulation and maintenance trust if it goes to the individual is 25 in respect to the period and exit charges?

A

As it starts at 18 it cannot have a period of 10 years only 7 til the age of 25 so that is why there is no charge.
There will however be an exit charge

56
Q

What are the definitions of a disable person? (3)?

A
  • By reason of mental disorder under the Mental Health Act 1983, they are incapable of administering their own property or managing their own affairs
  • In receipt of attendance allowance
  • In receipt of Disability Living Allowance by virtue of entitlement to the care component at the highest or middle rate
57
Q

What is a transfer for a disabled person classed as - a PET or CLT?

A

This is a PET even if it is a discretionary trust

AF1 2018/19 (16 decks)

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