Inheritance tax & the business relief exemption Flashcards
Are all transfers of value made by an individual chargeable to inheritance tax (IHT)?
Yes - unless exempt.
What are the three kinds of transfer (IHT trigger events)?
1) Potentially Exempt Transfers (PET) - made by a person during their life
2) Lifetime Chargeable Transfers (LCT) - made by a person during their life
3) Death
What is a Potentially Exempt Transfer (PET)?
A transfer of value made by a person during their lifetime to another individual
eg. a parent who gives their child a £10,000 contribution towards a deposit on a flat.
What is a Lifetime Chargeable Transfer (LCT)?
A transfer of value made by a person into a trust during their lifetime on or after 22 March 2006.
What gives rise to the Inheritance Tax (IHT) charge on death?
When a person dies, there’s a deemed transfer of all the assets that they own at the date of their death - this deemed transfer gives rise to the IHT charge on death.
PETs & LCTs - what is the relevant value for a lifetime transfer?
The amount by which the transferor’s estate is reduced, rather than the face value of the asset or the amount the transferee gains
for example - if the transferor gives away one item out of a complete set, the loss to the transferor may be more than the value of the one item given away.
Death - what is property in the taxable estate valued at?
The price it might reasonably be expected to fetch if sold on the open market immediately before the death.
When are the rates of IHT set?
Annually - by the budget for the tax year which runs from 6 April to 5 April.
What are the rates for the current tax year?
£0 - £325,000 = 0% (the nil rate band (NRB)
NRB may be higher/lower in certain situations
Above the NRB - 40% (death rate); or - 20% (lifetime rate - always 1/2 death rate applied to LCTs).
What is the ‘residence nil rate band’ (RNRB)?
An additional rate band (currently £175,000) for individuals who die on or after 6 April 2017, if they leave their family home to lineal descendants.
Can an individual’s surviving spouse/civil partner inherit the unused portion of their basic NRB/RNRB?
Yes.
How to work out a person’s cumulative total?
Cumulative total = the total chargeable value of all the chargeable transfers made in the previous seven years.
What is the effect of the cumulative total?
To reduce the NRB available for the current transfer
- you must calculate the value of the cumulative total before you can work out the NRB available.
What is the purpose of cumulative?
Cumulative is used to prevent individuals reducing their IHT liability by making a series of separate dispositions - instead of viewing each IHT chargeable transfer (failed PET, LCT, death) in isolation, HMRC also consider any other IHT transfers made in the seven years prior to the current transfer being taxed.
What is the available NRB to use for a transfer?
£325,000 less the cumulative total.
Are gifts to certain individuals or other entities exempt from IHT?
Yes - they can be made completely free from IHT & don’t use up the NRB.
Do gifts of particular assets benefit from reliefs?
Yes - where the conditions of the relief are met, the amount of IHT payable is reduced (sometimes by 100%).
Do exemptions & reliefs apply to all (PETs, LCTs & death estate)?
No - some only apply to PETs/LCTs, others only apply to death estate. Some apply to both.
Which exemptions & reliefs apply to lifetime transfers (failed PETs & LCTs) and the death estate, and should be considered for all chargeable transfers?
1) Spouse exemption - political party exemption
2) Charity exemption - exemptions for gifts for national purposes or to heritage maintenance funds
3) Business property relief - exemption for gifts to EBTs
4) Agricultural property relief - exemptions for gifts to housing associations
What does the exemption of business property relief apply to?
Applies to the value of qualifying business assets.
In which situations is the exemption of business property relief available to?
Lifetime transfers & the death estate.
What does business property include?
- A business or interest in a business (eg business of a sole trader or partnership)
- Shares in an unquoted company
- Shares in a quoted company
- Land or buildings, machinery or plant owned by transferor but used for business purposes by either a company of which the transferor has control, or a partnership of which the transferor was a partner
How long must the transferor have owned the business assets for?
At least two years immediately prior to the transfer
(note: BPR isn’t available if the business consists wholly or mainly for making or holding investments)
How much rate of relief is available in respect of transfers of a business or interest in a business or shares in an unquoted company?
100% relief applies to all private company shares irrespective of the size of the shareholding.
How much rate of relief is available to shares in a quoted company if the shareholder has control of the company?
50% but ONLY IF the shareholder had control of the company (unlikely but possible).
Calculating IHT due on a failed PET/LCT - step one
Calculate cumulative total.
Calculating IHT due on a failed PET/LCT - step two
Identify value transferred.
Calculating IHT due on a failed PET/LCT - step three
Apply exemptions & reliefs.
Calculating IHT due on a failed PET/LCT - step four
Apply NRB & calculate tax.
Calculating IHT due on a failed PET/LCT - step five
Apply taper relief
(only applies when IHT is being calculated after death)
Calculating IHT due on a failed PET/LCT - step six
Give credit for tax paid in lifetime
(only applies when IHT is being calculated after death)
Calculating IHT on death estate - step one
Calculate cumulative total.
Calculating IHT on death estate - step two
Identify assets included in the taxable estate.
Calculating IHT on death estate - step three
Value the taxable estate.
Calculating IHT on death estate - step four
Deduct debts/expenses.
Calculating IHT on death estate - step five
Apply exemptions & reliefs
(BPR fits into IHT calculation here)
Calculating IHT on death estate - step six
Apply RNRB.
Calculating IHT on death estate - step seven
Apply basic NRB and calculate tax.
When doing a calculation, should your round up or down to the nearest pound at each stage of the calculation?
Round down each individual figure to nearest pound at each stage of calculation.
