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MDG Revision > Inheritance Tax > Flashcards

Inheritance Tax Flashcards

1
Q

Interest in possession

  • Income Tax position : Trustee, beneficiary & settlor
  • CGT : Trustee, beneficiary & settlor
  • IHT

Expenses calculation

A
  • Income tax : Trustee > 20% or 7.5% dividend. No PA, PSA or DA
    Beneficiary > BR - liability met; HR - 20% additional AR - 25% (non tax payer - reclaim).
    Can use PA, PSA or DA
    Settlor - Unless settlor interested or PArental settlement

CGT -

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2
Q

What is situation re Domicile and IHT

  • Domiciled or Deemed Domicile
  • Domiciled elsewhere
  • What is Deemed Domiciled0
A
  • Domiciled - All assets-both UK & overseas
  • Domiciled elsewhere - UK assets only
  • Deemed Domicile =
    Someone resident for tax purposes in UK in 15 out of 20 tax years
    OR..
    Born in UK with UK domicile of origin - leaves- acquires domicile of choice elsewhere- returns toUK and is UK resident in relevant tax year
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3
Q

Valuing certain assets

  • Shares UTs. If sale price is less than market value on death
  • SHARES MUST BE SOLD BY WHEN
  • Land (as above)
    ….Also loss must be more than £x or x% of death value, whichever is lower
A
  • If shares UTs sold less - IHT based on sale price
  • Must be sold within one year
  • Land - IHT based on sale price
  • Normally, must be sold within three years
  • Loss must be more than £1,000 or 5% of death value, whichever is lower
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4
Q

What is a deed of variation

  • when used
  • What is allowed/conditions
A

When beneficiaries want estate to be distributed to somebody else in more tax efficient way eg to Grandkids
- Terms of will can be changed, provided all beneficiaries over 18 agree to changes. Must be drawn up within two years of death

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5
Q

List examples of Excluded Property

5

A
  • Pension funds
  • Non UK property, UTs & OEICS if non Dom
  • Reversionary interest in a trust (right to receive capital from trust when the life the tenants interest ends)
  • Gilts for non UK residents
  • Life policies written in trust
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6
Q

What is difference on how Joint tenants and Tenant in common property distributed

A
  • Joint tenant (each owns whole of property with other). On death the other owner automatically inherits their share
  • tenant in common - On death of one owner, other doesn’t automatically get others share. It goes to whoever stated in will or rules of Intestacy

Deceased’s share deemed to be 50% for joint tenant and actual share for tenants in common is included in estate for calculation of IHT

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7
Q

Gifts

  • How is a gift valued.
  • What is this principle known as
A
  • Gift is valued, based on the amount that leaves the estate
  • Known as “loss to estate principle”
    Eg x2 paintings £20k value individually - set value £50k. If one sold @ £20k, loss to estate is actually £30k (amount left in estate has fallen by)

Expenses can be deducted from value of gift if paid by recipient

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8
Q

What are the main IHT exemptions (4) (lifetime)

A
  • Annual exemption £3,000 pert tax year. Can C/F one year, once current year used. Can be used as part of larger gift and combined with marriage exemption
  • Marriage - £5k per parent per child,£2.5k grandparents, £2.5k from one party to other . £1k for anyone else
  • Small gifts of £250 per person per year. Can’t be used as part of larger gift.
  • Normal expenditure out of income
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9
Q

List the main transfers that are exempt from IHT during lifetime and on death (7)

A
  • Transfers between UK Dom spouses/civil partners - unlimited (even if not living together)
    Usually no value for IHT purposes when assets are exchanged prior to decree absolute.
    Doesn’t apply to common law or co-habiting couples
  • Transfer to non UK Dom spouse/civil - Limited to £325,000
  • Gifts for education & maintenance . Covers child up to 18 or end of full time education. Also to former spouse or dependant relative
  • Charity gifts
  • Gifts for national benefit
  • Death on active service
  • Gifts to political party
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10
Q

What are the three main PETS

A
  • Outright gift to individual
  • Gift into Bare trust (held in beneficiary name until 18)
  • Gift to Vulnerable Persons Trust (disabled person or under 18 whose parent has died)
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11
Q

What is the Cumulation Principle

A

On death, failed PETs and CLTs are added together and tax is due if NRB is exceeded. They are always accounted for first when working out the NRB left (if any) to set against the estate.
Dealt with in order they are made.

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12
Q

What is interaction with other taxes

A
  • When gift is made, it is a disposal for CGT purposes. Donor may have liability at time
  • Holdover relief maybe claimed for CLTs
  • PET if business assets
  • if recipient pays any CGT due, can be deducted from gift value for IHT purposes
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13
Q

What is a Chargeable Lifetime Transfer

  • Lifetime IHT charge if paid by recipient
  • If paid by Donor
  • How do you calculate tax on CLT
  • reporting
A
  • CLT is neither exempt or a PET. Subject to lifetime charge
  • Lifetime charge 20% (recipient) in excess of NRB
  • 25% (Donor pays) in excess of NRB
    NB: exemptions can be used when arriving at value for gift

When working out available NRB, need to take into account other CLTS’s (but not PETS) made in 7 years prior to current gift….They will use up NRB first. PETS are ignored because they are not yet chargeable.
Value of new CLT gifted to trust, together with any CLTs in last 7 years and exceeds NRB must be reported to HMRC

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14
Q

Residence Nil rate Band

  • When introduced
  • What is band worth in 2019/20 and 20/21
  • When available
  • is RNRB transferable
  • Over how much is RNRB reduced and by how much
A

RNRB introduced 6 April 2017
19/20 £150k 20/21 £175k - then raises by CPI
- Available when main residence left to direct descendant- child,grandchild,spouse of child/grandchild.
Also available when downsize after 7 July 2015 and leaves assets of equivalent value to direct descendant,
Transferable if 2nd death is after 6 April 2017. Irrelevant when 1st death occurred
RNRN reduced if over £2million, £1 for every£2 over threshold

Also available to step, adopted or fostered.
Does not include nephews, nieces, siblings and other relatives

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15
Q

What’s a Qualifying Residential Interest

  • Can RNRB be offset against B2L or investment property
  • What if propertynot owned at date of death
  • what if individual has no directly descendants
A
  • Qualifying Residential Interest is where the deceased owned or part owned a property that was their residence at some point during the period of ownership
  • RNRB cant be offset against B2L or investment property
  • Can’t use RNRB if, at date of death, do not own property (Qualifying interest)

Remember mortgage needs to be deducted from value

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16
Q

What is a Chargeable lifetime transfer

  • How is it charged , how much and when
  • What happens if donor dies within 7 years
A
  • lifetime transfer made in to a trust other than bare of disabled
  • immediately chargeable @ 20% if value > NRB taking into account last seven year cumulative total of CLTs (like for like)
    “ when looking to see whether there is a lifetime tax to pay on CLT, we look back 7 years to see if there have been any other CLTS. We ignore any PETS”
    If there were previous CLTS, these use up NRB
  • If dies within 7 years, CLT comes into estate and charged at 40%
    (Consider taper relief and deduct tax already paid ie 20% at time of lifetime transfer)
17
Q

What is 14 year rule

  • What does it impact on
A
  • If donor dies within 7 years of making a CLT, 40% death rate applies (less taper)
    Tax recalculated using value of gift and previous 7 years accumulation at date of transfer.
    CLTS MADE WITHIN 7 YEARS OF DEATH CAN BE IMPACTED BY EARLIER CLTS MADE UP TO 7 YEARS PREVIOUSLY.
18
Q

Business Relief

  • Availability
  • Exclusions
  • 100% relief
  • 50% relief
  • Lifetime gifts
A

Reduces value of estate for 1. unincorporated businesses (sole trader & partnerships)
2. Shareholding’s in AIM , unquoted companies, EIS SEIS (not VCT) = 100% Relief
OR
1. Controlling shareholding in fully listed company (over 50% ownership)
2. Assets owned by individual and used in business in which owners controls or partner in. 50%

  • For transfers of business property (during lifetime and on death) owned or used in a business for at least 2 years
  • Exclusions - wholly /mainly deal with securities, stocks & shares or land and buildings
  • 100% 1)sole traders , 2)partnerships - 3)shares in unquoted and AIM companies and 4) EIS & SEIS (NOT VCT)
  • 50% controlling shareholders in fully listed company, for land/buildings or plant/machinery wholly or mainly used in connection with a company/partnership controlled by transferor
  • If asset is given away and death occurs within 7 tears, business relief still available if recipient still owns the asset and it still qualifies as business property m,
19
Q

Agricultural Relief

Who benefits

  • Availability
  • Exclusions
  • 100% relief
  • 50% relief
  • interaction with business relief
  • lifetime gifts
A
  • Agricultural property in UK, Channel Islands, IOM and EEA on lifetime transfers and on death
  • Availability - agricultural land, crops and farm buildings and used for at least 2 years ( 7 years if let)
    NOT animals or equipment (may qualify for business relief)
    Exclusions - Relief given on agricultural value, not any development value or open market value of farmhouse
    Doesn’t apply to property subject to a binding contract for sale
  • 100% relief for owner occupied farms
  • 50% relief for land under tenancy (100% relief if tenancy exceeds 12 months)
  • Agricultural relief is given before business relief
  • If asset given away and death occurs within 7 years, agricultural
    Relief still available if recipient still owns and it still qualifies as agricultural property
20
Q
  • When is payment of IHT due
  • How is income charged up to the dat of death/after death

CGT ?

A
  • Payment of IHT due 6 months after month end in which death occurred by legal personal representative (grant of representation cant be obtained until IHT paid and accounts delivered)
  • Income charges at normal rates on income up til date of death, with all usual allowances available
    20% & 7.5%
21
Q

Transfer of nil rate band

  • WHat is allowed to be C/F
  • When must unused NRB be claimed by LPR
  • What’s maximum limit of NRB
A
  • percentage of unused nil rate band is allowed to be C/F
    LPR must claim unused NRB from first death after second death within 2 years from month end of surviving spouse death
  • maximum C/F is 100% ie nobody can claim more than x2 NRBs
22
Q

When does the charitable donation rate apply - What rate

A
  • Calculate net estate ie total estate - NRB (don’t include gift yet)= Net estate.
    Is donation over 10%? If so, 36% applies.

Calculation is then. Gross estate - donation - NRB = Net estate x 36%

23
Q

RNRB - £2 million limit

  • How are reliefs and exemptions treated
A
  • Reliefs and exemptions are ignored eg business relief and agricultural relief are ignored when calculating value of estate (even though taken into account when calculating IHT)
  • Does not include any lifetime gifts (even if made within 7 years)
24
Q

What are the qualifying conditions for Downsizing (RNRB)

A

Qualifying conditions

  • Individual died on or after 6 April 2017
  • property must have been owned by the individual and it would have qualified for RNRB if still owned
  • A lower value property and/or other assets of equivalent value are inherited by the individuals direct descendants on that persons death

Additional conditions

  • downsizing or disposal occurs on or after 8 July 2015
  • VAlue is net value after mortgages/debts
  • Downsizing RNRB is tapered away in same way as RNRB for estates above £2M
  • Claim must be made
25
Q

To get MAXIMUM RNRB (4)

A
  • Qualifying residential interest
  • Lineal descendants
  • Closely inherited
  • Estate not exceeding £2M
26
Q

Formula for Quick Succession Relief

A

Tax paid x net value X % relief

Gross value

27
Q

Other taxes on death

A

Income received after date of death - 7.5% and 20%’ no PA
Before death - normal rates . Have PA

CGT - Higher rates. AEA available for year of death plus 2 more.

28
Q

What is. Gift with reservation (GWR)

  • What is consequence of something being deemed a GWR
A
  • Someone gives away an asset but continues to benefit from it in some way
  • GWR is deemed to stay in the estate for as long as the reservations continues
    Eg gifting a holiday cottage but staying rent free for one month a year or giving portfolio of investments but still receiving dividends
29
Q

POAT

A
  • Is an income tax charge not IHT
  • When gets free or low cost enjoyment of an asset they formerly owned or provided money to buy
  • converts benefit into cash equivalent and added to income tax
  • For land cash equivalent is market rent
  • Chattels and intangible it is official income tax interest rate (2.5%) of capital value
  • Must be revalued every 5 years
  • No tax payable if less than £5,000
  • If full market rent is paid - no POAT. If contribution reduces
30
Q

Insufficient liquid assets to pay IHT bill

A
  • Borrow against value of assets/use of own assets
  • Executors loan
  • Apply direct to investment provider/debt management office to use assets to pay direct to HMRC
  • IHT can be paid by transferring national heritage property /artwork to crown
  • paid in instalments over 10 years @ 10% if house is kept and lived in
  • penalties and interest if not paid in time
  • If beneficiary of PET has no assets to settle liability, estate becomes liable

MDG Revision (20 decks)

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