Inheritance Tax Basics Flashcards
to be within scope of inheritance tax…
there must be a transfer of value of chargeable propery by a chargeable person
what makes a person a chargeable person?
- if they’re uk domiciled
- if not uk domiciled, but have UK assets
what are the two types of transfers of value?
transfers made when alive and transfers made when dead
how are transfers valued?
using the diminution in value principle
considers the fall in value of the donor’s estate following the gift
usually equal to MV at the time of the transfer
three stages of calculating inheritance tax?
1 - calculate chargeable amount
2 - calculating lifetime tax
3 - calculating death tax
CLT?
chargeable lifetime transfer
a transfer made to a trust
PET?
potentially exempt transfer
a transfer made to an individual which is exempt
exempt unless death occurs within 7 years of gift
how is chargeable amount for IHT calculated?
transfer value less exemptions
lifetime exemptions?
- small gifts exemption
- marriage/civil partnership exemption
- normal expenditure out of income
- annual exemption
general exemptions?
exemptions which apply to transfers in life and on death
include transfers to spouse, charity or qualifying political parties
small gifts exemption?
lifetime transfers <£250 are exempt per recipient per tax year
marriage/civil partnership exemption?
gifts made when someone gets married are exempt
dependent on donor’s relationship to recipient
parent = 5,000 exempt limit
grandparent/ancestor = 2,500 exempt limit
party to the marriage = 2,500 exempt limit
anyone else = 1,000 exempt limit
normal expenditure out of income?
a lifetime gift will be exempt if it:
- is a regular/habitual payment (e.g., payment of school fees)
- is made from donor’s income (not capital)
- doesn’t impact donor’s standard of living
annual exemption?
3000 annual exemption every year
unused AE from prior year can be carried forward
three types of lifetime transfer?
exempt
CLT
PET
PET?
lifetime transfer that isn’t into a trust
IHT is chargeable on a PET only if it is made in the seven years prior to death
CLTs?
transfer into trusts
trust?
where assets are transferred and owned by a trustee, on behalf of the beneficiary
trustee = legal owner
beneficiary = beneficial owner
NRB?
nil rate band
325,000 exempt amount before IHT becomes chargeable
what was the NRB prior to 2009/10?
312,000
lifetime tax rate?
trustees pay ….%?
donors pay …%?
lifetime tax rate is 20%
trustees pay 20%
donor pays 25%
rule of thumb for IHT regarding donors and trustees?
generally, tax rules are more generous if trustees pay
e.g., trustees pay 20%, donors pay 25% for lifetime tax
before the NRB is deducted, it must be reduced by the…
gross chargeable transfer value of any CLTs made in the seven years prior to the CLT we’re taxing
e.g., we’re taxing a CLT made in Nov2018, GCT of 200,000 for transfer made in Oct2012 (within 7 years) reduces the BRB to 125,000 (325,000-200,000)
how is GCT calculated?
gross chargeable transfer
- if the trustees pay the tax, the GCT is the chargeable amount
- if donor pays the tax, the GCT is the chargeable amount + lifetime tax paid by the donor
death tax is due on…
- the death estate
- lifetime transfers within 7 years of the donor’s death
death estate?
all assets - liabilities left behind on the date of death
do recipients pay death tax on lifetime transfers?
yes, on CLTs and PETs less than 7yrs before death
are PETs outside the 7 years prior to death ignored?
yes, they’re never subject to IHT
death tax %?
40%
taper relief for gifts made more than 3 years before death?
6-7 years = 20%
5-6 years = 40%
4-5 years = 60%
3-4 years = 80%
apply this % on top of the 40% death tax
is lifetime tax already paid deducted from death tax in respect to a particular CLT?
yes
but this deduction cannot generate a repayment (capped at 0)
transferee can claim to use a lower chargeable value on a CLT if…
- transferee still owns asset, but MV on death < MV at transfer date
- transferee sold asset before death, and sale was below MV at transfer date
does the reduction in value for fall in value relief alter the GCT value when calculating the available NRB?
no, GCT from lifetime tax remains constant
does fall in value relief apply to chattels with < 50 years life (wasting chattels)?
no
what determines the date the transferor or personal reps must provide HMRC with transfer details?
depends on the nature of the transfer
personal representatives?
PRs
executors appointed in the will or administrators estate if no will was made
due date for transfers?
CLT = 12 months after end of month in which transfer occurred
PET = 12 months after the end of the month in which the death occurred
HMRC will issue a notice of determination showing the inheritance tax payable when…
the accounts are submitted or HMRC believes IHT is payable
appeals must be made within…
30 days
if inheritance tax account is submitted late to HMRC…
penalties apply
due date and payer of lifetime tax on CLT between 6Apr and 30Sep
- paid by transferor
- due date 30Apr in following year
due date and payer of lifetime tax on CLT between 1Oct and 5Apr
- paid by transferor
- due date within 6 months of the end of the month in which transfer was made
due date and payer of death tax on CLT/PET/death estate
- paid by transferee/trustee/PRs
- due date is six months after end of month in which death occurred or on delivery of accounts by PR (if earlier)
how does payment of interest work for lifetime transfers?
interest runs from the due date to the day before the inheritance tax is paid
how does payment of interest work for death estate?
interest runs from the 6 months after the end of the month of death to the day before inheritance tax is paid
can payment by instalments be made?
yes
an election can be made to pay in 10 equal instalments for:
- lifetime tax on a CLT where the transferee pays the tax
- death tax on CLT/PET where transferee still owns the property and transferor’s death
- death tax on the death estate
when are lifetime tax instalments due?
on the date the whole amount would’ve been due
when are death tax instalments due?
at the end of the 6 months following the date of death
if property is sold, what happens to the payment due date?
inheritance tax is due immediately
on which assets are interest-bearing instalments available?
- shares/securities
- businesses and interests in businesses
- land
what happens when instalment payments are late?
interest will accrue from the due date to the day before payment is made
