Inheritance Tax - Lifetime Transfers

Question 1

What is the tax due on an immediately chargeable lifetime transfer?

Answer 1

The tax due on an immediately chargeable lifetime transfer (CTs only).

Question 2

What is the tax due if the transferor dies within seven years of making a lifetime transfer?

Answer 2

The tax due as a result of the transferor dying within seven years of making a lifetime transfer (LCTs and failed PETs).

Question 3

What is the cumulative total for IHT?

Answer 3

Cumulative total = value of all chargeable transfers made in 7 years prior to death.

Question 4

Does the RNRB apply to lifetime transfers?

Answer 4

The RNRB never applies to lifetime transfers.

Question 5

What are LCTs and PETs?

Answer 5

LCTs are lifetime transfers into a trust. PETs are lifetime transfers to an individual.

Question 6

What is the IHT rate for LCTs?

Answer 6

LCTs are immediately chargeable to IHT at a rate of 20%.

Question 7

What are the steps to calculate tax due on LCTs?

Answer 7

1. Calculate the cumulative total. 2. Identify the value transferred. 3. Apply exemptions and reliefs. 4. Apply basic NRB and calculate tax at the appropriate rate.

Question 8

What happens if the transferor dies within 7 years after an LCT?

Answer 8

The LCT must be reassessed, using the same 4 steps but applying a tax rate of 40% at Step D, then apply taper relief (Step E) and give credit for any IHT paid during the transferor’s lifetime (Step F).

Question 9

Who is liable to pay IHT for an LCT during the lifetime?

Answer 9

The person in whom the assets vest (donee) is usually liable to pay IHT.

Question 10

Who pays IHT for an LCT set up in a trust?

Answer 10

For an LCT, it will be the trustees of the trust which receives the assets.

Question 11

What happens if tax is not paid within the deadline after death?

Answer 11

If tax is not paid within 12 months from the end of the month of death, the personal representatives will become liable to pay.

Question 12

What is the general rule for IHT on the free estate?

Answer 12

IHT on the free estate is a general testamentary and administration expense, and the deceased’s PRs are liable to pay this tax.

Question 13

How is IHT paid from the estate?

Answer 13

IHT is paid from residue unless a contrary intention appears in the will.

Question 14

What is the preferred option for most testators regarding IHT?

Answer 14

The general rule is that gifts in a will (other than residue) are deemed to be given ‘free of tax’.

Question 15

What is the annual exemption for IHT?

Answer 15

The annual exemption (AE) is £3,000.

Question 16

Can the annual exemption be carried forward?

Answer 16

Yes, you can use AE from the previous year if not used, with a maximum of 2 AEs to use against a transfer (£6,000).

Question 17

What is the family maintenance exemption?

Answer 17

Maintenance payments are not treated as transfers for IHT purposes if made to a spouse, minor child, or dependent relative.

Question 18

What is the small gifts allowance?

Answer 18

Small gifts of up to £250 per recipient can be made free from tax.

Question 19

What is the marriage exemption?

Answer 19

A gift given in consideration of a marriage is exempt up to £5,000 if made by a parent of one of the parties.

Question 20

What is the normal expenditure out of income exemption?

Answer 20

A transfer of value is exempt if made from the donor’s income, as part of a normal pattern of giving, and does not affect the donor’s standard of living.

Question 21

What is taper relief?

Answer 21

Taper relief reduces the amount of IHT that would otherwise be payable on a lifetime transfer made 3-7 years prior to the transferor’s death.

Question 22

What are the tapper relief rates

Answer 22

0-3 years 100% IHT payed
3-4 years 80% IHT payed
4-5 years 60% IHT payed
5-6 years 40% IHT payed
6-7 years 20% IHT payed