M10: IHT Flashcards
What 4 steps must be followed to calculate IHT on a death estate?
Step 1: Calculate the value of the deceased individual’s net chargeable estate. To complete this calculation, we must consider:
1. Which assets to include.
2. How to value the assets.
3. Which debts owed by the individual can be deducted.
4. Whether any exempt transfers have been made out of the estate (exempt transfers can be deducted).
Step 2: Consider whether the residence nil rate band (RNRB) will be available to the individual and deduct it from the value of the net chargeable estate, if applicable.
Step 3: Calculate the value of any nil rate band (NRB) available. This amount is taxed at 0%.
Step 4 Tax the remaining estate at 40% (or 36% where there has been a large enough charitable donation (legacy) from the estate).
What is the pro- forma a death estate computation?
Pro-forma death estate calculation £
Property X
Less outstanding mortgage (X)
Stocks and shares X
Life assurance policy proceeds* X
Cars X
Personal chattels X
Debts (e.g. repayments of tax) due to deceased X
Cash and savings X
Less debts owed by deceased (X)
Less funeral expenses (X)
= Net estate X
Less exempt transfers (X)
= Net chargeable estate X
What is the rule surrounding life insurance policies in the death estate calculation?
If the beneficiary of the life insurance is the deceased then it’s included.
if the policy leaves money to a different beneficiary then it is excluded.
What are exempt transfers?
- Spouse/Civil partner
- UK-registered charity
- UK-recognised political party
What is the residence nil rate band?
When a residential property is left to a direct descendant ie.children/great-grandchildren then the RNRB is deducted from the net chargeable estate.
Its the lower of:
- £175,000
or
- Net value of property after mortgage deductions
What is the nil rate band?
A 0% tax on IHT of first £325,000 before considering any lifetime transfers made within 7 years of death of assets.
How much of any unused NRB/RNRB* can be transferred to a spouse or civil partner?
All of it BUT this election must be made by the executors of the second estate to utilise this rule.
i.e. use up remaining NRB of their partner that previously died to be used in addition to their own. E.g. 100k from deceased left and then original £325k from their own.
What rates of tax are normally applied to a death estate?
0% on the available NRB amount and 40% on remaining above that figure.
When is 36% used instead of 40%?
When a substantial portion of the estate is left to a UK-registered charity of >10% of the baseline amount (Net chargeable estate before deducting any RNRB but after deducting any available NRB.
Then any amount above the NRB is subject to 36% instead of 40%.
How does business property relief work?
BPR gives either 100% or 50% value reduction in the deceased estate if the following conditions are met:
- Relevant business property must be included in the estate.
- Ownership conditions must be satisfied.
- A binding sale contract must not be in place.
- The relief is reduced where “excepted assets” exist.
What is ‘relevant business property’ and what rates apply?
BPR is applicable to the following types of relevant business property (located anywhere in the world):
- Sole trade or partnership share – the whole business / partnership share must be transferred (100% relief).
- Shares in unquoted companies, including AIM listed companies (100% relief)
- Securities (e.g. loan stock) in an unquoted (including AIM listed) company held by a controlling (>50%) shareholder (100% relief)
- Land, buildings, machinery, or plant owned by the donor/deceased used in the donor/deceased’s partnership or controlled company (50% relief)
- Shares/securities in a quoted company held by a controlling (>50%) shareholder (50% relief).
What other conditions must be met for BPR to be available?
- Must have owned by the deceased for at least 2 years prior to the date of death.
- MUST NOT have a binding contract for sale.
What are excepted assets?
(& what’s the formula for qualifying value of shares?)
Assets typically held for investment rather than for trading purposes and
may include land, cash deposits in excess of working capital needs, shares in another company, and buildings rented to tenants.
Qualifying value of shares = Total value × (Value of total assets − value of excepted assets) / Value of total assets
When must an ‘account’ of the deceased’s estate be submitted and IHT be paid?
An account must be submitted and IHT paid within 12 months of the end of the deceased month.
I.e. 6th Oct death = End of Oct + 12months to submit and pay.
What can couples do to make sure they pay less IHT?
Transfer any unused NRB or RNRB to to the other spouse to reduce the overall IHT liability. BUT they need to make elections to utilise this rule within the later of:
- 2 years of the end of the month of the death of the second spouse/civil partner.
- 3 months from the date the executors first act for the estate of the second spouse/civil partner.
