Inheritance Tax Part 2 Flashcards
What do you need to consider with regards to calculating the value of a PET or CLT?
Ensure you have taken off the previous year (if available) and current years’ annual exempt amount of £3,000.
If a failed PET becomes chargeable, what rate of IHT is payable?
40%
How does lifetime tax interact with taper relief?
Lifetime IHT tax can be offset again death tax, but only to the point whereby it brings the IHT due on death to 0.
Key consideration in terms of calculating IHT on the estate and lifetimes transfers?
There are two separate calculations which need to be completed. A calculation for IHT on lifetime transfers and a calculation for IHT on the estate. These do not interact with each other.
Consideration surround calculating IHT on lifetime transfers
We revisit each lifetime transfer in turn for the seven years prior to death, including PETs that have now become chargeable, to see what tax would have been paid at the time they were made.
This could pick-up chargeable transfers in the seven years prior to the transfer in question, which means that chargeable transfers made up to 14 years before death could still influence IHT payable – this is the so called ’14-year rule’.
Each transfer is looked at as a separate calculation, using the current nil rate band and any available transferable nil rate band each time. However, the residence nil rate band cannot be used.
Explain the 14-year rule
The 7-year rule can become the 14-year rule. This happens when a person has made a CLT and, less than 7 years later, makes a PET.
If that person dies within 7 years of having made the PET, then both the original CLT and the subsequent PET are added back on to the total estate for IHT purposes.
This happens because the NRB is set against the gifts in chronological order. Until the first 7-year period (immediately after the original CLT) has expired, the gifter’s IHT nil rate band has not ‘refreshed’ and is therefore not available to be set against the second gift, the failed PET.
EVERY 7 YEARS THE NRB RESETS
Key consideration surround years to look back and 14 year rule?
We are generally looking back for CLTs in the 7 years before a transfer that we are reviewing, however any failed PETs would also affect the calculations. Past the 7 years before death point however, only CLTs would appear, as a PET that was made over 7 years ago is now fully exempt and has not become a failed PET.
What is the order you should calculate IHT stages?
Tax payable on gifts in lifetime
Tax payable on lifetime gifts that have become chargeable
Tax payable on the estate
What rate of tax is a chargeable CLT taxed at on a person’s death. Assume lifetime tax has been paid as there was an amount above the available NRB
40% death rates
reduce the tax by any taper relief
reduce it again, by the 20% lifetime tax previously paid.
If taper relief means there is no tax left, then you can’t offset the previously paid 20%
Explain, in detail, how any Capital Gains Tax (CGT) is calculated on the disposal of the assets of the estate by the executor during the estate administration, and state who is responsible for paying any tax due.
- The executor is liable for any Capital Gains Tax (CGT)on assets sold.
- Assets are treated as though they had passed to executor at the date of the death.
- The acquisition value is the market value as date of death/probate/base costs are reset.
- On disposal, any gain made during the administration period is potentially taxable/subject to CGT.
- The acquisition value is deducted from sale proceeds.
- Any costs of disposal are allowable.
- The full amount of the personal annual exempt amount/£3,000 is available for the tax year in which death occurred and for the 2 tax years following.
- The rate of tax payable is 20% on shares and unit trusts.
- 28%/8% surcharge would apply on disposal of residential property.
- Holdover relief can be used to defer the gain.
- In this case, the beneficiaries will be subject to CGT on eventual disposal.
State who is responsible for registering the Will Trust with the Trustee Registration Service (TRS) and when it must be done?
- The Will trust is excluded from registration for a period of 2 years from the date of death
- The trustees must register the trust with TRS
- 2 years after the date of death
- if the trust still exists/has not been wound up
- or earlier if the trust accepts additional assets
- or if it becomes a taxable trust.
Explain who is responsible for the reporting and payment of IHT and when this must be done to avoid any penalties.
- The personal representatives of deceased’s estate must make an IHT return to HM Revenue & Customs
- within 12 months of death
- The personal representatives are responsible for paying the tax on the estate.
- The donee is responsible for paying the tax on failed gifts
- IHT must be paid by the end of the 6th month after death.
- The personal representatives will be liable to pay the tax on the gift if not paid by the donee.
Explain how the investments (dividends) would be treated and taxed in the tax year of the deceased death. No calculations are required, income received prior to and after death
- Dividends from the unit trust would be paid gross.
- The dividend received before the date of death would be taxable as the deceased’s income in the
tax year of death - and subject to Income Tax at the deceased’s marginal rate
- in excess of any available personal allowance/dividend allowance (£2,000)
- The executors would be responsible for paying any tax due.
- Any dividends received after the date of death would be taxed against the estate
- at the rate applicable to personal representatives/7.5%/20%
- Personal representatives cannot use any allowances.
- The interest from the ISA is not taxable.
Explain the responsibilities executors have in respect of the reporting and payment of the IHT liability on an estate.
- Need to calculate the net value of the estate
- including details of any CLTs/PETs within 7 years
- and quick succession relief (QSR)
- report this to HM Revenue & Customs
- by completing IHT400
- within 12 months of death.
- Any tax due should be paid by the end of the 6th month after death.
Explain the impact of death on the tax treatment of an ISA
- The ISA will become a continuing ISA
- until it is closed by the executors
- or the administration of the estate is completed
- otherwise the ISA provider will close the account 3 years and 1 day post death.
- The account will retain its tax advantages
- although the value will still be included within the estate for IHT purposes.
