Inheritance tax - death estate and valuation

Question 1

The death estate: Definition

Answer 1

All the assets tow which the deceased was beneficially entitled at his death less debts and funeral expenses.

It includes anything acquired by reason of his death such as the proceeds (rather than surrender value) of a life assurance policy.

Question 2

Tax on death estate payable by…

Answer 2

the personal representatives

Question 3

The death estate is chargeable to IHT subject to exemptions where assets pass to:

Answer 3

• spouse
• charity
• political party

Question 4

IHT: Death estate: Debts and expenses

Answer 4

The following debts & expenses can be deducted in the computation of the death estate

• Debts incurred for full considration (eg credit card bills for good bought prior to death, rent due accrued to date of death, but not gaming debts as such debts are not incurred for consideration)
• Taxes imposed by law eg income tax, capital gains tax
• Reasonable funeral expenses, including cost of a tombstone

Where a debt is charged on a specific property eg a mortgage on a house, the debt is deductible primarily from the property on which it is charged.

Question 5

IHT - Quick Succession Relief - what is it?

Answer 5

If the deceased had acquired property in the five years before her death on which there was a charge to IHT (either a lifetime transfer on which IHT was paid on death or a death transfer) quick succession relief may reduce the IHT payable on the death estate

Question 6

IHT - Quick Succession Relief - calculation

Answer 6

Tax paid on first transfer x (net transfer /gross transfer) x relevant %

One year or less 100% relief
1 - 2 years 80%
2 - 3 years 60%
3 - 4 years 40%
4 - 5 years 20%

Question 7

IHT - fall in value relief

Answer 7

Where a property is transferred within 7 years before the transferor’s death and either

• the open market value on the transferor’s death is less than it was at the time of the transfer, if the transferee still owns the property or
• the property has been sold (bona fide to an unconnected person) by the transferee before the transferor’s death and the sales proceeds were less than the value at the time of the original transfer

then the transferee may claim that the IHT payable by him on the transferor’s death shall be computed by reference to the lower value.

For both PETs and CLTs the claim does not alter the value of the transfer in the cumulative total used for calculating the nil band for subsequent transfers or the death estate.

Question 8

IHT - Residence nil rate band - conditions

Answer 8

An estate is entitled to the RNRB if:

• the individual dies on or after April 2017
• the person owns a home or share of one so that it’s included in the death estate and
• their direct descendants inherit the home or a share of it

Question 9

IHT Residence nil rate band - maximum amount

Question 10

IHT Residence nil rate band - how to apply

Answer 10

The RNRB is in addition to the basic nil rate band. However it is only applied on the death estate, not lifetime gifts.

It should be set off the value of the whole estate (not just the home) before offsetting any remaining basic nil rate band.

Question 11

IHT Residence nil rate band - restriction

Answer 11

Where the estate exceeds £2m the RNRB is withdrawn by £1 for every £2 in excess.

The value includes the value of all assets less debts or liabilities but before deducting any exemptions such as spouse or charity exemptions, or any reliefs.

Question 12

IHT - What is transfer of nil rate band

Answer 12

This rule allows a claim to be made for the part of the nil rate band which is unused on the dearth of the first spouse to be transferred to the surviving spouse when they die.

Question 13

IHT - Calculating unused nil rate band to transfer

Answer 13

The nil rate band available to the survivor will be increased according to the proportion of the nil rate band that was unused at the death of the first spouse.

The proportion of the unused nil rate band is computed by reference to the nil rate band in force at the date of the first death. That unused proportion is applied to the nil rate band in force at the date of the survivor’s death. in order to calculate the value of the nil rate band he /she has available on her own death.

Question 14

IHT NRB more than one deceased spouse?

Answer 14

Yep you can have more than one deceased spouse transfer their NRB. But don’t keep killing them, there is a limit of one additional nil rate band being available on the death of the survivor.

Question 15

IHT NRB - how to claim

Answer 15

The claim must be made by the later of

• two years from the end of the month of death of the survivor or
• three months from the date the personal representatives first act for the survivor.

Question 16

IHT - Transfer of unused RNRB

Answer 16

Applies when surviving spouse dies after 5 April 2017, but it doesn’t matter when the first person died.

Question 17

IHT - reduced rate for estates leaving ….

Answer 17

10% or more to charity.

IHT is charged at 36% where an individual leaves at least 10% of his “net chargeable estate” to charity.

Question 18

IHT - “net chargeable estate” definition

Answer 18

The value of the estate after deducting all available reliefs, exemptions (not including the charity) and the remaining nil rate band but without deducting the charitable legacy itself.

NB no deduction for any RNRB.

Question 19

IHT - Quoted shares

Answer 19

NB different from CGT

Shares which are listed on the stock exchange are valued at the lower of:

• the quarter up rule and
• the average of the highest and lowest marked bargains on the day of transfer

Question 20

IHT: valuing Unit trusts

Answer 20

Units in an authorised unit trust are valued at the bid price (the lower of the two quoted prices)

Question 21

IHT: valuing Life assurance policies

Answer 21

If the individual dies owning a life assurance policy on his own life NOT written into a trust, the proceeds rather than the market value of the policy are included in his estate for IHT purposes.

If written into trust it is not part of estate.

Question 22

IHT - valuing assets held jointly

Answer 22

Where an asset is owned jointly and one of the joint owners makes a transfer of value, that individual’s interest must be valued.

Particularly where land is held jointly, it may not be possible for the individual’s interest to be disposed of freely. A discount of between 5% and 15% will be allowed from the full value of the interest. However this does not apply where related property is held.

Question 23

IHT - valuing overseas assets in the death estate

Answer 23

Where an overseas asset is included i the death estate quoted in a foreign currency, it must be converted into sterling using the exchange rate giving the lowest sterling valuation.

If additional admin costs are incurred due to the asset being located overseas, these costs can be deducted up to a maximum of 5% of the value of the asset.

Question 24

IHT - valuing related property - overview

Answer 24

rules apply to prevent taxpayers avoiding IHT by fragmenting ownership of assets to reduce the value of their estates for IHT. These are called related property rules. The related property rules are used for valuing land held jointly and for unquoted shares.

Question 25

IHT - What is related property?

Answer 25

Property related to the property comprised in the transferor’s estate which is
- comprised in the estate of his spouse or
- held or has been held in previous five years by
A charity or
A political party

as the result of a transfer made by the transferor or his spouse / civil partner.

Question 26

IHT - Related property valuations

Answer 26

Two valuations need to be compared
- the value of the transferor’s interest as if there were no related property and
The proportion held by the transferor of the value of the whole of the transferor’s itnterest plus related property.

The higher value applies.

For most property other than shares, the proportion is calculated by using the formula based on unrelated values

value of property transferred plus value of related property

and multiply this by the value of the total related property owned.