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Level 5 Business Tax Planning > Lecture 3B > Flashcards

Lecture 3B Flashcards

1
Q

What does capital transfer tax and inheritance tax refer to

A

CTT (Capital Transfer Tax) and IHT (Inheritance Tax) refer to the taxation of wealth transfers, particularly inheritance, in the UK

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2
Q

When was capital transfer tax introduced

A

Introduced: 1975

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3
Q

What did CTT replace

A

CTT replaced Estate Duty

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4
Q

What was estate duty a tax on

A

Estate Duty was a tax on the total value of an estate upon death

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5
Q

Why did the Labour government under Harold Wilson introduce CTT

A

The Labour government under Harold Wilson introduced CTT to broaden the tax base

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6
Q

What is CTTs aim to reduce

A

aiming to reduce wealth inequality

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7
Q

Why did CTT face criticism

A

it faced criticism for being complex and burdensome, particularly for middle-income families

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8
Q

When was inheritance tax intriduced

A

Introduced: 1986

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9
Q

Who introduced inheritance tax

A

The Conservative government under Margaret Thatcher replaced CTT with Inheritance Tax

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10
Q

What were the key changes from CTT to IHT

A

Key Changes:
- IHT focused mainly on taxing estates at death, simplifying the system.
- Lifetime gifts were generally exempt if made more than seven years before death
- Transfers between spouses or civil partners were exempt, encouraging wealth transfer within families

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11
Q

Where is IHT levied

A

IHT is levied on estates exceeding a threshold (the nil-rate band, currently £325,000 as of 2024)

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12
Q

What is the tax rate on estates valued above the nil-rate band

A

Amounts above this threshold are taxed at 40%

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13
Q

What are lifetime transfers

A

Under the UK Inheritance Tax (IHT) system, lifetime transfers refer to the transfer of assets or money made during a person’s lifetime

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14
Q

What lifetime transfers are exempt from IHT

A

Examples include:
- Annual Exemption
- Small Gifts Exemption
- Marriage or Civil Partnership Gifts
- Regular Gifts out of Income
- Gifts to Spouses/Civil Partners

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15
Q

What is the annual exemption you can gift upto

A

You can gift up to £3,000 per tax year without it being subject to IHT

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16
Q

What is the small gift exemption rate

A

Gifts of up to £250 per person per tax year are exempt

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17
Q

What is the marriage or civil partnership exemption rate

A

Parents can gift £5,000, grandparents £2,500, and others £1,000

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18
Q

When do potentially exempt transfers become exempt from IHT

A

PETs become exempt from IHT if the donor survives for seven years after making the gift

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19
Q

What is taper relief

A

Taper Relief: If the donor survives for 3–7 years, the IHT due on the PET is reduced based on the time elapsed since the gift

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20
Q

What are charges to most trusts or companies treated as

A

Transfers made to most trusts and companies are treated as chargeable lifetime transfers (CLT)

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21
Q

What charge are CLTs subject to

A

CLTs are subject to an immediate IHT charge if they exceed the nil-rate band (currently £325,000). A 20% tax is levied on the value exceeding the threshold

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22
Q

What is the inheritance tax rate for gifts before 3 years of death

A

Gifts 3 years before death don’t get any tax relief and are subject to 40% IHT

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23
Q

What is the inheritance tax rate for gifts between 3-4 years of death

A

Gifts 3-4 years before death get a 20% tax relief taking the IHT down to 32%

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24
Q

What is the inheritance tax rate for gifts between 4-5 years of death

A

Gifts 4-5 years before death get a 40% tax relief taking the IHT down to 24%

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25
Q

What is the inheritance tax rate for gifts between 5-6 years of death

A

Gifts 5-6 years before death get a 60% tax relief taking the IHT down to 16%

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26
Q

What is the inheritance tax rate for gifts between 6-7 years of death

A

Gifts 6-7 years before death get a 80% tax relief taking the IHT down to 8%

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27
Q

What is the inheritance tax rate for gifts before 7 years of death

A

Gifts 7 years before death get a 100% tax relief taking the IHT down to 0%

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28
Q

What is taxed by inheritance tax on death

A
  • The Estate
  • Lifetime Transfers
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29
Q

What is included in the estate

A

The Estate: This includes all property, money, investments, possessions, and any other assets owned at the time of death

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30
Q

What is included in lifetime transfers

A

Lifetime Transfers: Gifts made within seven years of death are added back to the estate for IHT purposes

31
Q

What is the current Residence Nil-Rate Band if the diseased passes their primary residence to direct decedents

A

if the deceased passes their primary residence to direct descendants. The RNRB is currently £175,000 per person

32
Q

What is the tax free fresh hold per individual when standard and residence nil-rate bands combine

A

Combined with the standard nil-rate band, this allows many estates to pass up to £500,000 tax-free per individual (or £1 million for a married couple)

33
Q

What are exemptions and reliefs from IHT

A

Exemptions and Reliefs:
- Spouse or Civil Partner Exemption
- Charitable Donations
- Business and Agricultural Reliefs

34
Q

How is an estates value calculated

A

Add the value of all assets owned at death.
Subtract liabilities

35
Q

Who pays IHT

A

Usually, the executor or administrator of the estate pays IHT from estate funds before distributing assets to beneficiaries

36
Q

When is IHT due

A

IHT is typically due six months after the end of the month of death

37
Q

How can IHT be paid for certain assets

A

For certain assets (e.g., property or shares in a business), IHT can be paid in 10 annual instalments, though interest applies

38
Q

What are a main type of assets

A

Main Categories of Assets:
- Property
- Cash and Bank Accounts
- Investments
- Personal Belongings
- Business Assets
- Life Insurance Pay-outs
- Trust Assets
- Foreign Assets

39
Q

What are the steps to calculate the income tax

A

Estate Valuation for UK Inheritance Tax (IHT):
- Identify Assets in the Estate
- Deduct Liabilities
- Account for Lifetime Gifts
- Apply Exemptions and Reliefs
- Calculate the Taxable Estate
- Calculate IHT Payable

40
Q

What liabilities are deducted

A

Deduct Liabilities
- Debts
- Funeral Expenses
- Unpaid Taxes or Bills

41
Q

Taxable estate =

A

Taxable Estate = Total Value of Assets - Liabilities - Exemptions

42
Q

What happens to the taxable estate when 10% of it is left to charity

A

If 10% or more of the net estate is left to charity, the IHT rate on the remaining taxable estate is reduced from 40% to 36%

43
Q

How much can you gift a year tax free

A

You can gift £3,000 per tax year free of IHT

44
Q

When are gifts from surplus income exempt

A

Gifts made from surplus income (not capital) are exempt if:
- They are part of a regular pattern
- They do not reduce the donor’s standard of living

45
Q

When are gifts to political parties excempt

A

Gifts to political parties are exempt if they have at least two MPs or one MP with at least 150,000 votes at the last general election

46
Q

What types of business assets get 100% IHT relief

A

100% relief for:
- Shares in an unlisted trading company
- Sole trader businesses or partnerships

47
Q

What types of business assets get 50% IHT relief

A

50% relief for:
- Shares in a company listed on the AIM stock exchange
- Land, buildings, or machinery used in a qualifying business

48
Q

What types of agricultural relief get 100% IHT relief

A

100% relief for:
Farmland and farm buildings actively used in agriculture

49
Q

What types of agricultural relief get 50% IHT relief

A

50% relief for:
Certain tenanted farmland

50
Q

How does woodland relief work

A

Woodland Relief:
- The value of timber grown in commercial woodlands is exempt from IHT
- However, the land itself may still be taxable

51
Q

How does heritage relief work

A

Heritage Relief
- Exempts certain buildings, land, or objects of national, historical, or scientific interest if they are preserved and made available to the public

52
Q

What is the tapper threshold

A

Taper Threshold
- Estates valued over £2 million lose £1 of the RNRB for every £2 over the threshold

53
Q

How do gifts with reservation of benefits work

A

If the donor retains use of or benefits from an asset after gifting it, it remains part of their estate for IHT purposes

54
Q

What qualifies as a potentially exempt transfer

A

What Qualifies as a PET?
- Gifts to individuals
- Certain gifts to trusts, such as bare trusts, which give beneficiaries an absolute right to the assets

55
Q

What qualifies as a chargeable lifetime transfer

A

What Qualifies as a CLT?
- Gifts into most types of trusts
- Transfers of property or assets where control or ownership is retained indirectly

56
Q

What does taper relief only apply to

A

Taper relief only applies to the additional tax due on death, not to the initial 20% tax paid on the CLT

57
Q

How do you use CLTs for strategic planning

A

Use CLTs for strategic planning, such as setting up trusts, ensuring that amounts stay within the nil-rate band when possible

58
Q

What conditions must be met to qualify for business property relief (BPR)

A

To qualify for BPR, the following conditions must generally be met:
- The business must be wholly or mainly trading
- The deceased must have owned the business property or asset for at least 2 years before their death
- The assets or business interests must pass to a qualifying beneficiary

59
Q

What businesses or assets don’t qualify for BPR

A

Certain types of businesses or assets do not qualify for BPR, such as:
- Businesses primarily engaged in investment activities
- Non-trading assets held for personal use or investments
- Businesses that are being wound up

60
Q

When can business assets transferred during a persons lifetime qualify for BPR

A

Business assets transferred during a person’s lifetime can also qualify for BPR if the 2-year ownership condition is met

61
Q

What does BPR reduce upon death

A

The relief reduces the value of qualifying business property included in the deceased’s estate, potentially eliminating any IHT liability on these assets

62
Q

What can BPR work alongside

A

BPR can work alongside other IHT exemptions and reliefs, such as the spouse exemption or agricultural relief

63
Q

What are some planning considerations for BPR

A

Planning Considerations:
- Ensure the business remains predominantly trading rather than investment-focused
- Maintain clear records of ownership to ensure the 2-year qualification period is met
- BPR rules can be complex, particularly for mixed-use businesses or assets

64
Q

What is agricultural property relief

A

Agricultural Property Relief (APR) is an inheritance tax (IHT) relief that reduces the taxable value of qualifying agricultural property by 50% or 100%

65
Q

Who is APR designed to help

A

It is designed to help farmers and landowners pass on agricultural assets without incurring a significant IHT burden

66
Q

What doe 100% APR relief apply to

A

100% Relief:
Applies to:
- Owner-occupied farmland and farm buildings.
- Land let under certain tenancies
- Farmhouses that are occupied as part of the farm business and are of a character appropriate to the farm

67
Q

What doe 50% APR relief apply to

A

50% Relief:
Applies to:
- Land and buildings let under tenancies that began before 1 September 1995
- Agricultural assets owned but subject to a retained interest

68
Q

What qualifies for APR

A

To qualify for APR, the property must meet certain conditions:
- Includes farmland, farm buildings, farmhouses, cottages, and woodland used for agricultural purposes
- Relief applies to the agricultural value of the property
- The deceased must have owned the property for at least 2 years if they farmed it themselves or let it under certain tenancies

69
Q

What is agricultural value

A

the value of the land or property as used for agriculture

70
Q

When can APR and BPR overlap

A

APR and BPR can sometimes overlap, particularly for mixed-use properties or businesses

70
Q

What is the ownership requirement if the farmland is let out

A

If the property is let, the ownership requirement is extended to 7 years, and the tenant must use it for agricultural purposes

70
Q

When can farmhouses qualify for APR

A

Farmhouses and cottages can qualify for APR if:
- They are occupied as part of the agricultural business
- They are of a character appropriate to the size and nature of the farm
- They are actively used for agricultural purposes

71
Q

What assets don’t qualify for APR

A

The following do not qualify for APR:

  • Land or property not actively used for agriculture
  • Farmhouses or cottages not occupied as part of the farming operation
  • Agricultural assets owned for investment purposes

Level 5 Business Tax Planning (12 decks)

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