Inheritance tax - basic peinciples

Question 1

IHT Transfers of value

Answer 1

A charge to IHT arises if a transfer of value of chargeable property is made by a chargeable person (the transferor)

This charge may arise during the lifetime of the transferor or on his death

Question 2

IHT Starting point in calculating the value of a gift:

Answer 2

the diminution in value in the transferor’s estate

Question 3

IHT types of trust:

Answer 3

Distctrionary trusts and interest in possession trusts

Question 4

IHT Discretionary trust

Answer 4

A trust where no beneficiary is entitled by right to any income or capital; it is left up to the discretion of the trustees which of the beneficiaries is to benefit from the trust and how they are to benefit

Question 5

IHT Interest in possession trust

Answer 5

A trust where one or more of the beneficiaries has the right to receive the income of the trust (an interest in possession), the capital passing to other beneficiaries when the interest in possession comes to an end.

Question 6

IHT Dispositions which are not transfers of value

Answer 6

Examples:

• Dispositions without gratuitous intent
• Dispositions made for the maintenance of the transferor’s family (essentials)
• Gratuitous dispositions which constititute allowable expenditure for the purposes of income tax

Question 7

IHT Chargeable persons

Answer 7

An individual who is domiciled in the UK is liable to IHT in relation to all of his worldwide property.

An individual who is not domiciled in the UIK is liable to IHT only in relation to property situated in the UK. HIs on-UK property is excluded property.

Question 8

IHT Exempt transfers

Answer 8

An exempt transfer has no effect for IHT so no IHT can be payable on it and it does not form part of the cumulation of transfers

• Transfer to spouse / civil partner.
• Gifts to charities
• Gifts to qualifying political parties

Question 9

IHT Qualifying political party

Answer 9

A politica party which at the last general election before the transfer of value was made, had

• two members of parliament elected to the house of commons, or
• one member of parliament elected to the house of commons and not less than £150,000 votes were given to candidates who were members of that party.

Question 10

IHT Annual exemption

Answer 10

Lifetime transfers of value in any one tax year are exempt to the extent that they do not exceed £3,000

If there is more than one transfer of value the exemption is used against transfers in chronological order, even if a transfer is a PET, which is initially exempt

If the transferor does not use all of his annual exemption in a tax year, the unused excess can be carried forward to be used in the next tax year, but not any further. However, the current year’s annual exemption is used first.

Question 11

IHT Marriage exemption

Answer 11

Lifetime transfers of value are exempt if the transfer is made to one of the parties to a marriage / civil partnership in consideration of that marriage taking place.

Limits:
£5,000 where the transferor is a parent of one of the parties
£2,500 where the transferor is a remoter ancestor (eg grandparent)
£2,500 if transferor is one of the parties (eg a gift to your wife)
£1,000 in any other case

Question 12

IHT Small gifts exemption

Answer 12

Exempt if they do not exceed £250 to any one transferee

It is not possible to use this towards a larger gift

Question 13

IHT Normal expenditure out of income

Answer 13

Exempt if it is made as part of the normal expenditure out of income and that he is left with sufficient income to maintain his usual standard of living.

It must be shown that it is part of a regular pattern of giving, or at lest that they intended it to become part of such a regular pattern.

School fees.

Question 14

IHT Chargeable lifetime transfer (CLT)

Answer 14

A CLT is immediately chargeable to IHT when it is made. In addition further tax mmay be payable on a CLT if the transferor dies within 7 years of making the transfer.

Question 15

IHT Potentially exempt transfer (PET)

Answer 15

A PET is treated as an exempt transfer during the lifetime of the transferor. If the transferor survives secen years from making the transfer, the PET is an exempt transfer and has no IHT consequences (it still uses up the annual exemption)

However, if the transferor dies within seven years of making the PET, it is a chargeable transfer and IHT may be payable.

Question 16

Chargeable lifetime transfers - what counts?

Answer 16

• a discretionary trust

- a non qualifying interest in possession trusts on or after 22 March 2006

Question 17

Chargeable lifetime transfers - rate of tax

Answer 17

0 - 325,000 0%

325,000 + 20%

Question 18

IHT Pro forma: lifetime tax

Answer 18

Acronym: GENT
£ £
Gift x
(AEs)-CY
-PY (x)
——
A
NRB at gift x
Less GCTs in 7 years before gift (x)
——
Tax 20% if trustee pays (x)
20/80 (if donor pays) ——-
B

Question 19

IHT - Gross chargeable transfer

Answer 19

Gift less AEs if trustees pay
Gift Less AEs + tax if donor pays

In exam, assume donor pays if not told

Question 20

IHT - chargeable lifetime transfer - tax if donor pays

Answer 20

20/80

Question 21

IHT - chargeable lifetime transfer - tax if trustees pay

Answer 21

20%

Question 22

IHT: If the transferor pays

Answer 22

This is a further diminution in his estate. He has made a net chargeable transfer of value of the amount of the transfer to trustees, but we must computer tax on the GROSS chargeable transfer of value.

We simplify this calculation by saying that the tax on the amount of the transfer in excess of the available nil rate band is 20/80.

The gross transfer of value is the net transfer of value plus the IHT paid by the transferor.

Question 23

Chargeable lifetime transfers - calculation of additional tax on death

Answer 23

If the transferor dies within 7 years, additional IHT may be payable.

The IHT is calculated using the nil rate band at the date of death (not the date of the CLT)

However, you still need to look back seven years from the date of the CLT (not 7 years from the date of death) to see whether any of the nil rate band has been used up.

Question 24

Taper relief

Answer 24

Period between CLT and death:

3-4 years - 80% chargeable
3-5 years - 60% chargeable
5-6 years - 40% chargeable
6-7 years - 20% chargeable

Question 25

Pro forma: Additional IHT on death following a CLT

Answer 25

Gross chargeable transfer x
NRB @ death x
Less GCTs in 7 years before gift (x) (x)
—-
x
——-
Tax at 40% x
——
After taper relief x
Less lifetime tax paid (x)
——-
IHT payable x

Question 26

Transfers treated as PETs

Answer 26

A PET is made on a transfer by the transferor to:

• an individual other than spouse
• a trust in which an individual has an interest in possession where trust was made before March 2006