Inheritance Tax and Capital Gains Tax

Question 1

Broadly speaking, on what 2 bases are IHT charged?

Answer 1

1. As if T made a TRANSFER OF VALUE of his whole estate (assets - liabilities - reliefs) immediately before death
2. Including any POTENTIALLY EXEMPT TRANSFERS made within 7 years of T’s death

Question 2

What is the overarching test for whether particular property forms part of the estate for IHT purposes?

Answer 2

1. Whether T was BENEFICIALLY ENTITLED to the property
2. IMMEDIATELY BEFORE DEATH

Question 3

Timing of valuation when valuing the estate for IHT purposes?

Answer 3

Value immediately before death

Question 4

How is jointly owned land valued for IHT purposes?

Answer 4

1. Usually OMV adjusted by a District Valuer consulted by HMRC
2. Discounted by 10-15% to reflect difficulty of selling a shared interest
3. Except when co-owned with a spouse or CP - related property rules require the shared interest to be valued WITH THE RELATED PROPERTY

Question 5

How are shares valued for IHT purposes?

Answer 5

Based on the lower of two quoted prices (or market value, for unquoted shares)

Question 6

What is the IHT rate and when is it payable?

Answer 6

40%

6 months after the end of the month of death

Question 7

What is the spousal exemption?

Answer 7

Any property that passes to T’s spouse or CP under his will or intestacy or by survivorship is EXEMPT FROM CGT

NB: includes trust property - e.g. property left to spouse with life interest and children on remainder will be entirely exempt as a spousal transfer

Question 8

5 categories of gifts that may be tax exempt?

Answer 8

1. Gifts to charities
2. First 3000 GBP of gifts per year (can be carried forward one year if unused)
3. GIfts to individuals of up to 250 GBP per person
4. Gifts in consideration of marriage
5. Potentially exempt transfers

Question 9

When will taper relief begin on Potentially Exempt Transfers?

Answer 9

When the transfer is made in the 4th year after death, effective IHT tax rate on the gift is 32% and reduces by 8% for every year after that.

If transfer was made over 7 years ago, no IHT is payable on the gift.

Question 10

When assessing IHT on gifts, what 3-step analysis should you follow?

Answer 10

1. Apply any exemptions (small gifts, annual gifts)
2. Apply post-exemption gift value to nil rate band
3. If nil-rate band is exceeded, apply PET tapering relief

Question 11

When and how does Quick Succession Relief apply (4 points)?

Answer 11

1. Person receives chargeable transfer that increases the value of his estate
2. IHT was paid on the original transfer
3. Recipient dies within 5 years of receipt,

Then the tax payable on the second transfer is effectively reduced according to the tax paid on the first transfer

Question 12

What is the current nil rate band? How can it be transferred?

Answer 12

325,000 GBP.

Unused allowance can be transferred: (1) ON A PERCENTAGE BASIS (2) to a spouse or CP

Question 13

What is the tax rate on chargeable LIFE TRANSFERS?

Answer 13

20% if paid by the transferee.

25% if paid by the transferor.

Question 14

When must HMRC IHT accounts be prepared: (1) for the estate and (2) for chargeable lifetime transfers?

Answer 14

Within 12 MONTHS of the END OF THE MONTH in which: (i) death occurs or (ii) the transfer occurs

Question 15

When must IHT be paid (2 options)? What is actually done in practice?

Answer 15

SIX MONTHS after the END OF THE MONTH of death
OR
If account is delivered earlier, ON DELIVERY OF THE ACCOUNT

In practice, PRs usually just make payments on account before the due date in order to obtain the grant of representation.

Question 16

3 kinds of property on which IHT can be paid in 10 annual instalments?

Answer 16

1. Land
2. Business interest
3. Controlling shares or securities in a company

Question 17

For what period of time do the PRs need to account for T’s income tax?

Answer 17

1. Tax year in which death occurred
2. Date of death to finalisation of estate administration

Question 18

When do PRs not need to report the estate to HMRC for deaths before 5 April 2024?

Answer 18

If the only income received during administration was: (1) from bank account interest and (2) below 500 GBP

Question 19

When do PRs not need to report the estate to HMRC for deaths from 6 April 2024 onwards?

Answer 19

If the estate’s income from any source is below 500 GBP, it need not be reported to HMRC.

Question 20

How is the income tax personal allowance dealt with on the death of the taxpayer?

Answer 20

1. Full personal allowance for the tax year of the death to set against income arising up to the date of death
2. No personal allowance (including savings and dividends) for income after the date of death

Question 21

How do you determine the value of an asset that is subsequently disposed of by the PR, for CGT purposes?

Answer 21

1. HIGHEST MARKET VALUE
2. At the DATE OF DEATH

Question 22

Why is there said to be a “tax free uplift” on death?

Answer 22

Any increase in asset value between the date of acquisition and the date of death will escape the tax net.

Question 23

Main CGT relief that PRs can rely on?

Answer 23

Any unused capital losses in the tax year of death can be carried back and set against gains realised by T in the previous 3 years

Question 24

When will CGT be payable on an act of administration?

Answer 24

Where the act involves SELLING ASSETS

A simple transfer by PR to B = no CGT, B takes at probate value

Question 25

For how long are PRs entitled to a PR-exemption?

Answer 25

Single annual exempt amount is for 3 TAX YEARS (beginning with the tax year in which the death occurred)

Question 26

When will PPR apply to estate assets?

Answer 26

When the property was a PPR immediately prior to death