Inheritance Tax: Basic Principles

Question 1

Define transfer of value

Answer 1

Gift of ANY asset resulting in a REDUCTION in the donors estate

Question 2

What is chargeable property in relation to inheritance tax?

Answer 2

All property to which a donor is beneficially entitled

Question 3

Who is defined as a chargeable person in relation to inheritance tax?
What indicates which chargeable property is chargeable in the UK and state the differences?

Answer 3

An INDIVIDUAL who is:

UK domiciled - Chargeable on worldwide assets

Not UK domiciled - Chargeable on UK assets only

Question 4

What are the 2 types of transfer of value?

Answer 4

Death estate

Lifetime transfers

Question 5

How are transfers valued?

Answer 5

Diminution of value principle

Difference between total value of estate before and after transfer

Question 6

What are the 3 stages of the inheritance tax pro-forma

Answer 6

Step 1 - Calculating chargeable amount
Step 2 - Calculating lifetime tax
Step 3 - Calculating death tax

Question 7

What is the small gifts exemption

Answer 7

£250 lifetime transfer per recipient per tax year

No part exemption on over £250, all or nothing!!

Question 8

What is the marriage/civil partner exemption?

Answer 8

Parent - £5,000
Grandparents - £2,500
Party to marriage - £2,500
Anyone else - £1,000
(Part exemption allowable)

Question 9

What makes normal expenditure out of income exempt from Inheritance tax?

Answer 9

Regular, habitual payments
Made out of donors income
Doesn’t impact donors standard of living

Question 10

What is the annual exempt amount? (AEA)

What are the rules RE prior year AEA?

How does it get applied?

Answer 10

3k

Unused prior year AEA can be B/F

Applied to CLTs and PETs in chronological order but NOT on death estate

Question 11

What are the 3 general transfer exemptions for IHT?

Answer 11

Donors spouse/civil partner
Charity
Qualifying political party 
(MP+150k votes)
STATE THIS IN EXAM

Question 12

What are the 2 Chargeable lifetime transfers

Answer 12

Creation/transfer to discretionary trust

Creation of non-qualifying
interest in possession trust (IIP)

Question 13

When is a chargeable lifetime transfer (CLT) chargeable and what are the tax %s

Answer 13

At the time the gift is made
ASSUME Donor pays tax - 25% on net transfer
STATES Donee pays tax - 20% on gross transfer
At the time of death CLT < 7 before death
Donee pays 40% less tax paid in lifetime

Question 14

When is a Potentially Exempt Transfer (PET) chargeable to inheritance tax?
Tax %?

Answer 14

On death if transfer made within 7 years of death

40% tax (subject to tapering relief)

Question 15

What is the nil rate band (NRB) in:
Tax year 08/09
After 08/09 to date
How does it work?

Answer 15

£312,000 08/09

£325,000 going forward

Covers Gross chargeable transfers over a 7 year period!
note that PETs are not chargeable unless < 7 before death

Question 16

How do you find the gross chargeable transfer if the donor pays the tax?

What is this used for?

Answer 16

Net transfer after exemptions and nil rate band + 25% tax = gross chargeable transfer

This is used to reduce the nil rate band on future CLTs/death estate

Question 17

What is chargeable to IHT at stage 3 - death tax?

Answer 17

CLTs within 7 years of death
PETs within 7 years of death
Death estate

Question 18

Tax rate for lifetime IHT?

Tax rate for Death IHT?

Answer 18

Lifetime IHT - 20%

Death IHT - 40% (relief for lifetime tax paid/tapering relief/QSR relief)

Question 19

What is taper relief?
What is the amount of relief affected by?
What % of tax is charged per period

Answer 19

Relief on CLT and PET within 7 years, more relief the further away the transfer was from death
Affected by years before death:
3/4 years - 80% charged
4/5 years - 60% charged
5/6 years - 40% charged
6/7 years - 20% charged

Question 20

Can taper relief generate a repayment of IHT on the death estate after deducting lifetime tax?

Answer 20

No - the deduction cannot generate a repayment

Question 21

What is fall in value relief?

Answer 21

Claim for use of lower value on lifetime transfers when calculating the death tax

Question 22

What instances can someone claim fall in value relief?

When is this relief made in the computation?

Answer 22

MV at death is lower than when lifetime transfer was made
MV on sale made within 7 years is less than when lifetime transfer was made
Made before NRB is calculated