Inheritance Tax Planning Flashcards
Which Debts are not Deducitble for Inheritance Tax?
- Loans not settled by the Estate.
- Loans funding a Qualifying Foreign Currency Account.
- Loans for acquiring, maintaining, or enhancing Property excluded from IHT.
- Loans used to purchcase Qualifying Assets under:
- Woodlands Relief;
- Agricultural Relief; or
- Business Property Relief.
When may a Loan used to Purchase Assets Qualifying for Relief be Deducted from the Taxable Estate?
- When the Loan’s value is first Deducted from the Qualifying Asset’s value.
- If the former is greater than the latter, the difference may be Deducted from the Estate.
Consider the following example.
Estate Composition:
* House: £400,000
* BPR-qualifying Shares: £100,000 (100% Relief)
* Cash: £200,000
Debts:
* Loan for Shares: £25,000
* Funeral Expenses: £5,000
Calculation:
-
Deduct Debts:
- Shares reduced to £75,000 (£100,000 - £25,000).
- Funeral expenses deducted.
- Estate Value: £700,000 - £25,000 - £5,000 = £670,000
-
Apply BPR:
- Deduct £75,000 (remaining value of shares after loan deduction).
-
Taxable Estate:
- £670,000 - £75,000 = £595,000
What are the Elements of a Gift with Reservation of Benefit (“GROB”)
Lack of Bona Fide Possession:
- The Donee does not assume genuine possession and enjoyment of the Property at or before the start of the Relevant Period.
- Up to seven years before the Donor’s Death.
Donor Not Entirely Excluded:
- At any time during the Relevant Period, the Property is actually or virtually not enjoyed to the Donor’s entire exclusion.
“Virtually” means “for all intents” or “as good as” completely Excluded.
What constitutes Bona Fide Possession?
- Timing: Possession and enjoyment must commence at the start of the Relevant Period.
- Actual Enjoyment: The Donee must physically enjoy or receive income from the Property.
- Vested Beneficial Interest: The Donee must have a legal right to the Property’s benefits.
What constitutes Exclusion of the Donor?
- Denial of any enjoyment of the Property’s benefits, barring negligible benefits like occassional visits.
- If the Donor is a potential beneficiary of a Trust holding the Gifted Property, Exclusion is impossible.
What is the Effect of Reserving Benefit in a Gift for Inheritance Tax?
Reservation at Death:
- The Property is included in the Taxable Estate at its Probate Value.
Cessation of Reservation before Death:
- The Gift is treated as a PET from the date of cessation.
- No Annual Exemption applies.
Double Charge Relief applies, preventing the same Asset from being taxed twice.
What is the Effect of Reserving Benefit in a Gift for Capital Gains Tax?
- The Donor will be taxed on any Chargeable Gains between Acquisition and Disposal.
- The Donee becomes the Owner for tax purposes when the Gift is made.
- The Donee’s base cost is the Gift’s Market Value when it was made.
What is the Pre-Owned Asset Charge (“POAC”)?
- An annual Income Tax charge on Individuals that continue to benefit from Assets they have disposed of.
- GROBs are exempt from POAC, and Individuals can elect to suffer its effects instead of POAC
When does the Pre-Owned Asset Charge apply?
- Land: Occupied by the Individual after Disposal.
- Chattels: Possessed or used by the Individual after Disposal.
- Intangible Property in Settlor-Interested Trusts: For example, cash or shares in Trusts where the Settlor can benefit.
How does the Pre-Owned Asset Charge apply to Land?
Pre-Conditions:
- The Individual occupies the Land; and
- The Individual previously owned the Land but Disposed of it; or
- The Individual contributed toward the Land’s Disposal without obtaining a Beneficial Interest.
Tax Implications:
- The Individual will be taxed based on the Market Rent for occupation.
How does the Pre-Owned Asset Charge apply to Chattels?
Pre-Conditions:
- The Individual occupies the Land; and
- The Individual previously owned the Land but Disposed of it; or
- The Individual contributed toward the Land’s Disposal without obtaining a Beneficial Interest.
Tax Implications:
- The Individual will be taxed based on the Chattel’s Market Value, plus the official rate of interest.
How does the Pre-Owned Asset Charge apply to Chattels?
Pre-Conditions:
- The Trust is Settlor-interested.
- The Trust holds Intangible Property provided by the Settlor after 17/03/1986.
Tax Implications:
- The Individual will be taxed based on the Property’s Market Value, plus the official rate of interest.
Which Transactions are Excluded from the Pre-Owned Asset Charge?
- Transfers to S/CPs.
- Family Maintenance.
- Annual and Small Gift Exemptions.
- Arm’s Length Sales: Transactions at Market Value to unconnected persons.
- Seven-Year Rule: The Contribution Condition was met more than seven years before occupation or use began.
What is the General Anti-Abuse Rule (“GAAR”)?
A Penalty of 60% on Gains from aggressive Tax Avoidance schemes that exploit loopholes.
When does the General Anti-Abuse Rule apply?
Condition 1 — Tax Arrangement:
- There must be an Arrangement resulting in a Tax Advantage.
- Gains will be asssessed based on the Counterfactual.
Condition 2 — Tax Advantages within Scope:
- The Tax Advantage pertains to a GAAR Tax, e.g. IHT.
Condition 3 — The Main Purpose Test:
- The Arrangement’s primary purpose, or at least one of them, was obtaining a Tax Advantage.
Condition 4 — The Double Reasonableness Test:
- The Arrangement cannot reasonably be seen as a reasonable course of action under relevant tax, considering all the circumstances.
HMRC Guidance:
- GAAR targets Schemes violating the intended purpose of Tax Law, and those lacking genuine economic substance.
