Inheritance Tax (IHT) Flashcards
What are the two types of lifetime gifts? Give an example for each
PET’s = potentially exempt transfers
(only chargeable if donor dies within 7 years of gift)
Example: Gift of cash
Tax rates - death rates
CLT’s = chargeable lifetime gifts
(immediately chargeable at date of gift) - if falls within nil band rate no IHT will be chargeable, anything above this will be taxable at 20%
Example: Gifts to trusts (not charitable trusts)
Tax rates - Lifetime rates
When is residence nil rate band available?
For lifetime gifts - not available
For death estate - available if residential property left directly to direct descendants (children/grandchildren)
Deceased must have lived in the property
Available RNRB will be lower of:
- £175,000
- net value of residential property
If residence is worth more than £2 million, reduce nil rate band by £1 for every £2 excess
What are the payment dates for IHT arising on PET’s on death?
6 months from end of the month of death
What are the payment dates for CLT’s made in lifetime?
6 April - 30th Sept: 30 April next year
1st Oct - 5th April: 6 months after end of month of gift
What is related property?
Special rules where same type of property owned by:
- Spouse/civil partner
- Exempt body (e.g. charity) as a result of an exempt transfer to them by the donor or the donor’s spouse
All assets expect unquoted shares:
(Value of individual’s share/ Value of individual + related party shares) x value of combined assets
Unquoted shares:
Uses the same formula, but ‘number of shares’ not value
What are the marriage exemptions arising on death IHT?
Parent - £5,000
Grandparent - £2,500
Other - £1,000
What is the small gifts relief exemption?
£250
What is the IHT annual exemption?
£3,000 per annum
any unused from previous year can be carried forward but only for one year (current year is used in priority to carried forward)
Applied after all other reliefs and exemptions have been applied
What is fall in value relief?
The donee must still own the asset at the date of donor’s death, or
Have sold it in an arms length transaction
Deduct from the chargeable amount, the fall in value from the date of gift to the date of death or earlier sale.
What are the 2 key conditions of Business Property Relief (BPR)?
- Transfer of relevant business property Quoted shares 50% Unquoted shares 100% Assets (land, buildings, P&M) 50% Sole trader 100%
- Minimum period of ownership (at least 2 years)
When a business property is inherited and was eligible for BPR at that time, what happens on the second death?
There is no minimum ownership period of BPR on the 2nd death (successive transfer rules apply)
What is Agricultural Property Relief?
Applies to the agricultural value
Rate of relief = 100%
Property must have been owned for:
Farmed by owner - 2 years
Farmed by a tenant - 7 years
Is there an IHT saving from gifting a farm in the lifetime as opposed to death?
No IHT saving from making lifetime gifts which qualify for APR, better to gift on death
What assets are exempt from IHT on the death estate?
All assets are chargeable (i.e. no exempt assets for IHT)
Assets that are exempt for CGT (e.g motor cars, gilts, ISAs, PRR etc) are not exempt from IHT
What are exempt legacies for IHT purposes?
Legacies to:
Spouse/civil partner
Charity
Political party
What is a gift with reservation?
Lifetime gift where donor retains a benefit (e.g gift of legal title to house but donor still lives in it)
- bring into estate computation as if gift was never made
- can be avoided if the donor pays market rent to live in the house to donee.
What is the substantial legacy to charity?
Reduced rate of 36% rather than 40% applies to death estates where:
- Total charitable legacies on death is more than 10% of the baseline amount
Baseline amount =
Taxable estate plus charitable legacies plus residence nil rate band
What is a deed of variation?
The beneficiaries of the will can sign to donate further money to charity to ensure 10% of the baseline amount is satisfied by charitable donations
This will mean that they can benefit from the 36% rate of IHT on death estate
Must be signed within 2 years of death, must be in writing
What is the limit on exempt transfers for married couples (UK)?
Unlimited
What is the limit on exempt transfers for married couples if non-UK domicilied?
Maximum exemption is the current nil rate band
What happens to any unused nil rate band and residential nil rate bands on death of spouse?
Can be carried over to other partners death estate to increase their own NRB and RNRB by any unused percentage of their partners
What is the advice for couples leaving assets which qualify for BPR or APR?
They should not leave assets which qualify for BRP or APR to their spouse as the legacy would be covered by the inter-spouse exemption and the benefit of BPR or APR is lost
Should be left to non-exempt beneficiaries
What is the advantages of making lifetime gifts?
- The value of the gift is frozen on the date that the gift is made
e. g. gifting a house which is going to appreciate in value, fall in value relief will also be available if this doesn’t go to plan - less IHT as lifetime exemptions such as annual exemption, marriage exemption, small gift relief is available
- taper relief is available if the donor lives for more than 3 years
What are the disadvantages of lifetime gifts?
- No RNRB available if residential property is gifted in lifetime
- APR of BPR on lifetime gift withdrawn if the donee does not retain asset at donors death. Therefore, better to secure BPR/APR by retaining asset in donor’s estate
What is meant by skipping a generation?
By gifting to grandchildren rather than children, avoids a further IHT charge when the children die
Such planning requires for the children to be independently wealthy, such that they have no need for the inheritance.
What is the benefit of gifting assets into a trust during lifetime?
Means that assets not in settlor’s estate on death
Assets which appreciate in value (i.e. houses) will increase in value outside of the settlor and beneficiaries estates
