Inheritance Tax - Chapter 1

Question 1

What is the definition of inheritance tax?

Answer 1

There must be:

1. Transfer of Value: gift of any asset resulting in a reduction in the donor’s estate.
2. Of a chargeable property: all property to which a donor is beneficially entitled.
3. By a chargeable person : which can be either UK Domiciled (on all worldwide assets) or not UK domiciled (on UK Assets Only)

Question 2

When does a transfer in value occur?

Answer 2

Results in a reduction of donor’s estate:

• Can be wealth of a person when they die (death estate)
• Lifetime transfers (any gift which reduces the donor’s estate)

Question 3

How is a transfer in value valued?

Answer 3

Valued using diminution in value principle, which looks at the fall in value of the donor’s estate as a result of the gift. Which is usually equal to the open market value of the asset transferred at the time of the transfer.

Question 4

What are the exemptions that apply to lifetime gifts?

Answer 4

The following are exemptions that apply to lifetime gifts only.

1) Small gift exemption:
- Lifetime transfers of value made by a donor in any one tax year are exempt if they do not exceed £250 per recipient per tax year.
- This exemption does not apply, if this is part of a larger gift

2) - Marriage-Civil Partnership Exemption
- Relief is given to a party of a marriage/civil partnership.

The amount depends on the relationship of the donor to the recipient:

- Parent - £5000
- Grandparent or remote: £2500
- Party to marriage of civil partnership: £2500
- Anyone else: £1000
- This can exempt part of a larger gift
- Relief is given before the annual exemption

3) - Normal expenditure, out of income

A lifetime gift will be exempt if it is:

- Regular, habitual payment (children school fees by grandparents).
- Made out of donor’s income and not capital.
- Does not impact donor’s standard of living.

4) - Annual exemption
- The first £3000 gifted each tax year not covered by other exemptions or reliefs is exempt
- Unused AE can be carried forward on year but the current AE is offset first
- It is always applied chronologically even if the first gift is a PET (Potentially Exempt Transfer) which never becomes chargeable
- Rule of law: It is important to understand the correct exemption rules so that the correct transfers are taxed.

Question 5

What transfers (made either during lifetime or death) are exempt from IHT?

Answer 5

The following transfers, whether made in life or death are exempt from IHT:

• To the donor’s spouse or civil partner
• To Charity
• To Qualifying political parties: (Two MPs, or one MP and at least 150,000 votes)

Question 6

What are the types of lifetime transfers?

Answer 6

1) Exempt transfers
2) Chargeable Life time transfers
3) Potentially exempt transfers

Question 7

What is a chargeable life time transfer?

Answer 7

A transfer will only be classified as a chargeable lifetime transfer if it is a transfer into a certain type of trust.

In a trust there is a separate legal and beneficial ownership of assets: assets are transferred to trustees who are the legal owners, trustees hold the assets on behalf of the beneficiaries.

Question 8

What are two types of trust?

Answer 8

There are two types of two types of trusts that can be created:

1) Discretionary trust (benefit is given at the discretion of the trustees).

2) Non-qualifying interest in possession trust (if beneficiary is entitled to income of the trust, however, the capital is passed to some other beneficiaries.

Question 9

What does the NRB allow to do?

Answer 9

The Nil rate band is of £325,000, below which the chargeable transfers are deemed to be at 0% IHT (exempt).

The NRB was £312,000 in 08/09

Question 10

What is the rate of the lifetime tax and why does it vary?

Answer 10

After the NRB is deducted lifetime tax is calculated.

The lifetime tax rate depends on who pays the tax:

• Trustees pay the tax: 20%
• Donor Pays the tax (default assumptions): 25%

Question 11

What is the role of the GCT? And how does it vary?

Answer 11

Before the NRB is deducted it must be reduced by the gross chargeable transfer (GCT) value of any CLTs made in the seven year prior to the CLT we are taxing:

• If the trustees pay the tax, the amount gifted is considered to be gross of tax, so the CGT is simply the chargeable amount.
• If the donor pays the tax, the amount gifted is considered to be net of tax, so the GCT is the chargeable amount plus any lifetime tax paid by donor.

Question 12

When is death tax due?

Answer 12

Death tax is due on any lifetime transfers within seven years of the donor’s death, as well as on the death estate.

The recipient (donee or trustees of trust) is liable to pay the death tax due on a lifetime transfer.

Question 13

How do we tax for CLTs and PETs occured within 7 years of the death?

Answer 13

Every transfer subject to death gets the NRB relevant in the tax year of death.

Before the NRB is deducted from each transfer it is reduced by the GCT value of any PETs or CLTs which are:

• Within seven year prior to the particular transfer (not the date of death), and
• Chargeable to IHT (lifetime tax or death tax for CLTs; death tax for PETs)

This means that PETs outside the seven year prior to death are ignored at stage three of the calculation and will never be subject to IHT.

Question 14

What is the taper relief and how does it work?

Answer 14

After the deduction of the NRB, the remainder is taxed at 40%

Taper relief is given for gifts made more than 3 years before death:

• Over 3 but less than 4 years : 80 % (percentage charged)
• Over 4 but less than 5 years : 60 % (percentage charged)
• Over 5 but less than 6 years : 40 % (percentage charged)
• Over 6 but less than 7 years : 20 % (percentage charged)

Lifetime tax already paid in respect of a CLT is deducted from a death tax in respect of that same CLT, but this deduction cannot generate a repayment.

Question 15

What is the fall in value relief?

Answer 15

The transferee can claim to use a lower chargeable value when calculating the death tax on a lifetime transfer if:

• The transferee still owns the asset received but the MV on a death is below the MV at the date of transfer; or
• The transferee sold the asset before the death of the donor but the MV at the sale was below the MV at the date of transfer.

The reduction in value does not alter the GCT value when calculating the available NRB for subsequent transfers subject to death tax (I.E. use the GCT value from the end of stage 2 before any fall in value relief).

The relief does not apply to chattels with a life of no more than 50 years, or plant and machinery.

Question 16

Who are Personal Representatives?

Answer 16

Executors appointed in the will or the administrators of the estate if no will is made

Question 17

Due date by which the details need to be provided to HMRC?

Answer 17

CLT 12 Months after end of month in which transfer occured

PETs which become chargeable/death estate 12 Months after end of month in which death occurred

Question 18

What is a notice of determination and by who and why is issued?

Answer 18

HMRC will issue a notice of determination showing the inheritance tax payable when:

• The accounts are submitted, or
• HMRC believes inheritance tax is payable

Appeals must be made within 30 days

Question 19

What is the due date of a payment of inheritance tax?

Answer 19

1) if the CLT is made between 6th April and 30th Septmer, then the tax is due on 30th April in the following year

2) if the CLT is made between 1st October and 5th April then the tax is due 6 months after the end of the month

3) If on death, that the tax is due to be paid, 6 months after the end of the months of death or when accounts got delivered by PRs (whichever occured first

Question 20

How does the payment of interest work?

Answer 20

For lifetime transfers interest runs from the day the payment is due to the day before the inheritance tax is paid

For the death estate, interest runs from six months after the end of month of death to the day before the inheritance tax is paid

Question 21

Explain payment by instalments in every aspect:

Answer 21

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 CLTs and PETs where the transferee still owns the property at transferor’s death
• Death tax on death estate

For lifetime tax the first instalment is due on the date the whole amount would have been due; For death tax the first instalment is due at the end of the six months following the date of death.

If the property is sold, the remaining inheritance tax is due immediately

Only interest-bearing instalments are examinable in TC: these are available on the following assets:

• Unquoted shares and securities which do not qualify for BPR
• Businesses and interests in businesses (including partnerships) which do not qualify for business property relief
• Land

Late paid instalments will accrue interest from the due date to the day before the payment is made.