Inhertiance Tax Flashcards
What are the three main occasions where inheritance tax may be charged?
- Death- When an individual dies IHT is charged on the value of their estate.
- Liftime gifts made to individuals within Seven years prior to death- IHT is charged on certain lifetime gifts or transfers if the donor dies within seven years after making them. Such gifts to individuals are called potentially exempt transfers’ because at the time the transfer is made no IHT is chargeable.
If the transferor survives for seven years, the transfer becomes exempt.
- Lifetime gifts to a company or into a trust- A lifetime gift to company or into a trust is immediately sharable to IHT at the time when it is made unless the trust is for a disabled person.
What is IHT charged on?
The valued transferred by a chargeable transfer. The term chargeable transfer is defined as a transfer of value which is made by an individual but it is not an exempt transfer.
What is the method for calculating IHT?
- Identify the transfer of value- A lifetime transfer of value is any disposition which reduces the value of the transferor’s estate. On death, tax is charged as if the deceased had made a transfer of value.
- Find the value transferred- For a lifetime transfer, this amount of the reduction in the transferor’s estate. On the death, it is the value of the estate.
- Apply any relevant exemptions and reliefs- These reduce or eliminate the IHT charge on any given transfer. Some exemptions apply to both lifetime transfers and to the transfer on death eg a transfer to spouse or civil partner. Other are more restricted and apply only to lifetime transfer e.g annual exemption.
- Calculate tax at the appropriate rate- There are two bands which apply to IHT:
(a) The nil rate band £325,000 available for all transfer of value.
(b) The residence nil rate band 15k frozen until 2027/28 available only on a transfer on death whether there is a ‘qualifying resdiential interest’
What is the process of cumulation?
The nil rate band will not necessarily be available in full for any given transfer.
To calculate the available nil rate band on any transfer whether during lifetime or death, it is necessary to first look back over the seven years immediately preceding transfer.
Any charavle transfer made by the transferor during that period must be taken into account in order to determine how much of the bill band remains available. This process is known as cumulation and is used solely to calculate whether the nil rate band is available for any charagble transfer.
Is the residence nil rate band available to all transfer
It is not available for lifetime transfer.
How is the transfer of value identified on a transfer of death? (step 1)
When a person dies, they are treated for IHT purposes as having made a transfer of value immediately before their death. The value transferred is the value of the deceased’s estate immediately before death.
The estate is all the property which the deceased was beneficially entitled immediately before their death with the exception of excluded property contained in s5 IHTA 1984.
Property included within the definition of an estate falls into three categories:
(a) Proeprty which passes under the deceased will or intestacy.
(b) Property to which the deceased was beneficially entitled immediately before death but which does not pass under a will for example property owned as joint tenants.
(c) Property included because of special statutory provisions, this is where the law regards the deceased as beneficially entitled to certain teepee of property, theses include
(i) certain trust property;
(ii) and property given away by the deceased during lifetime but which is subject to a reservation at the time of death.
Explain how the law regards certain trust property to be included in the estate on a transfer of DEATH.
A person who is entitled to the income from a trust is treated for IHT purposes as beneficially entitled to the capital which produces that income.
This means that where a beneficiary who is entitled to all the income from such a trust dies, the trust fund is taxed as if it were part of the beneficiary’s estate.
The type of beneficial interest covered by these provision is now as a ‘ qualifying interest’ in possession.
To be an interest in possession, it must be an interest under which the beneficiary is entitled to claim income from the trust property or enjoy trust property in some equivalent way such as living in it, with no power on the part of the trustees to decide whether or not the beneficiary should receive it.
An interest in possession arising before 22 March 2006 will be a qualifying interest in possession.
Now a qualifying interest arises in limited circumstances, one being the interest arising on the death of the settlor under their will or intestacy.
Explain how the law regards property subjected to reservation to be included in the estate on a transfer of DEATH.
The rule is designed to prevent people avoiding tax by parting with ownership of property but continuing to enjoy the benefit.
The rule applies where the deceased gave away property during their lifetime but did not transfer ‘possession and enjoyment’ of the property to the donee or was not entirely excluded from enjoying the property.
If the property is subject to a reservation at the time of the donor’s death, the donor is treated as being ‘beneficially entitled’ to the property.
What type of property would be excluded from the estate when there is a transfer on death.
Property which the deceased did not have a beneficial interest in.
Two common examples of property outside the definition are life assurance polices, once it is written in trust for a named beneficiary because the proceeds are no longer payable to the deceased estate.
And a discretionary lump sum payment made from a pension fund to the deceased family because the pension trustees are not obliged to pay it to the deceased’s estate.
Excluded property contained in s5 IHTA 1984?
An example is a revisionary interest. This means a future interest under a settlement, for example an interest in remainder under a trust.
How do you find the value transferred on death? (step 2)
Basic valuation principle- Assets in the estate are valued for IHT purposes at ‘The price of which property might be reasonably be expected to fetch if sold in the open market’ immediately before the death.
This means that the value immediately before death of every assest forming part of the estate must be assessed and reported to HMRC. Some assests such as bank and building society accounts are easy to value.
To allow for difficulty in selling a share of jointly owned land, its value may be discounted. The discount applied is normally up to 10 percent for commercial property and 15 per cent for residential property.
Liabilities owed by the deceased at the time of death are deductible for IHT purposes provided that they were incurred for money or money’s worth. The deceased reasonable funeral expenses are also deductible.
The value of an asset agree for IHT purposes is known as the probate value.
When finding the value transferred on death ( Step 2) how quoted shares valued?
The value of quoted shares is taken from the stock exchange daily official list for the date of death or the nearest trading day.
The list quotes two prices. To value the shares for IHT, take one quarter of the difference between the lower and higher price and add it to the lower price.
102p-106p= 4p
4p divided by 4= 1p
1p+ 102p= 103p.
What are relevant exemptions and reliefs applied on transfer of death & how are they applied? (step 3)
The main exemptions applicable on death depend on the identity of the beneficiary. Reliefs depend on the nature of the property in the estate.
Spouse exemption- Any property included in the estate for IHT purposes is exempt if it passes to the deceased spouse or civil partner under the deceased’s will or intestacy or, in the case of joint property, by survivorship.
The rule applicable to qualifying interest in possession is that IHT is charged as if the person with the right to income owned the capital. This rule applies for the purpose of spouse exemption, both on creation of the trust whether by will or intestacy and on the death of a life tenant.
Charity Exemption- Any property forming part of the deceased estate for IHT purposes which passes on death to charity is exempt. The Exemption most commonly applies to property which passes to charity under the deceased will. However, if the deceased had a life interest in trust property which passes under the terms of the trust to charity, the charity exemption applies. A similar exemption applies to gifts to certain national bodies and bodies providing a public benefit, such as museums and art galleries and to political parties.
Business property relief- This operates to reduce the value transferred by a transfer of value of relevant business property. The relief only applies where the business is ‘trading’ in nature.
(i) A reduction of 100 per cent of the value transferred is allowed for transfers of value where the value transferred is attributable to a business or an interest in a business including a partnership share; and company shares that are not listed on the a recognised stock exchange.
(ii) A reduction of 50% of the value transferred is allowed for a transfers of value where the value is attributed to company shares that are listed on a recognised stick exchange if the transferor had voting control ( 50% of the votes on all resolutions) immediately before the transfer. or;
land, buildings, machinery or plant owned by the transfer personally but used for business purposes by a partnership of which the transfer is a member, or by a company of which the transferor has voting control.
In assessing whether or not a person has voting control, separate shareholdings of spouses or civil partners can in certain circumstances, be taken as one, so that if the combined percentage of the votes gives the couple voting control then the test will be satisfied.
AGRICULTURAL PROEPRTY RELEIF- This is the value of the property if It were subject to a perpetual covenant prohibiting its use other than for agriculture.
The property must have been occupied for the purpose of agricultural for 2 years prior to the transfer or that It was owned by the transferor for the seven years prior to the transfer and was occupied by someone throughout that period for the purposes of agriculture.
A reduction of 100 per cent is allowed where either the transferor had the right to vacant possession immediately before the transfer or where the property was subject to a letting commencing on or after 1st September 1995.
A reduction of 50 percent is allowed in other cases.
What are the time limits for reliefs of IHT on transfers on death.
To attract any relief at all, the assests in question must have been owned by the transferor for at least tow years at the time of the transfer or broadly, must have be a replacement for relevant business property where the combined ownership is two years.
If property is is inherited from a spouse or civil partner, the surviving spouse/ civil partner is deemed to have owned the property from the date is was originally acquired by the deceased. This rule does not apply to lifetime transfers between spouses and civil partners
How is the tax calculated at the appropriate rate for a transfer on death ( step 4)
Nil rate band- If the deceased has made no chargeable transfers in the seven years before death, the rate of tax on the first 325k is 0%.
If the estate exceeds the NRB, IHT is normally charged on the excess at 40%.
A special rate of 36% can be applied when at least 10% of a defined component of persons net estate passes to charity.
If the deceased died on or after October 9 2007 having survived a spouse or civil partner, The NRB in force at the date of death of the survivor is increased by whatever percentage of the NRB of the first to die was unused by them.
RESIDENCE NIL RATE BAND- For deaths occurring after 6 April 2017, the RNRB is available in addition to the nil rate band.
For the RNRB to apply, the deceased must die owning a ‘qualifying residential interest’ which is closely inherited.
A qualifying residential interest is an interest in a dwelling house which has at any time been the deceased’s residence and which forms part of the deceased estate.
For a property to be closely inherited it must pass to
(i) a child, grandchild, or other lineal descendant of the deceased outright or in certain types of trust. Lineal descents are defined as children, step children, adopted children, foster children or children where the deceased has been appointed as guardian.
(ii) the current spouse or civil partner of the deceased lineal descent’s or
(iii) the widow or surviving civil partner of a lineal descendant, unless such persons have remarried or formed a new civil partnership before the deceased death.
The RNRB is taxed first at 0% reducing the amount of the total chargeable estate, then subject to cumulation, the NRB is taxed next at 0% and finally the remaining death estate at 40 percent.
How is the residence nil rate band applied on a transfer of death, where the estate is valued at £2million or more?
Where the estate is valued at £2 million or more, the RNRB is reduced by £1 for every £2 over the £2 million threshold.
175k- value of estate - £2 million divided by 2.
If the deceased has not used all of their RNRB, like the NRB any unused RNRB may be claimed by a serving spouse, even if the spouse died before 6 April 2017.
