Post-death Arrangements Flashcards
Adverse tax consequences if beneficiary gives away inheritance?
Potential adverse inheritance tax (IHT) and capital gains tax (CGT).
How could adverse IHT arise for donor beneficiary?
Making a Potentially Exempt Transfer (PET) which becomes chargeable if they die within 7 years.
How could adverse CGT arise for donor beneficiary?
Gift of non-cash asset seen as disposal; CGT charged on increase in value since date of death if exceeding tax-free allowance.
Methods to alter original distribution post-death to mitigate tax?
Variation, Disclaimer, Precatory trust, IPFDA court order, Capital distribution from trusts within 2 years of death.
What is a variation?
Direction by original beneficiary to PRs to transfer their inheritance benefit to another person.
Can beneficiary choose anyone for variation?
Yes.
When is a variation possible?
Only after inheritance has been accepted.
Tax treatment of variation?
Read back to date of deceased’s death; no negative tax effects for donor.
Conditions required for valid variation?
In writing by original beneficiary, within 2 years of death, statement that s142 applies, no consideration.
Do beneficiaries need PR approval for variation?
No, unless additional IHT is due.
PR’s duties if variation results in additional IHT?
PR must sign the variation and provide HMRC with copy.
Can PR refuse variation approval?
Yes, if estate assets insufficient for additional tax.
Effect if variation reduces IHT liability?
PRs can claim a refund from HMRC.
Components of Capital Gains Tax (CGT)?
Charged on disposal of non-cash assets; gain calculated by increase in value between acquisition and disposal.
Does a gift count as disposal for CGT?
Yes.
When can CGT liability arise for beneficiaries?
If asset increased in value since date of death and gifted by beneficiary.
How to avoid beneficiary CGT liability on inheritance gift?
Implement s62 writing back effect (similar to variation).
Conditions required for valid CGT s62 writing back?
Same as variation: in writing, within 2 years, explicit s62 statement, no consideration.
Effect of writing back on CGT disposal?
No longer counts as disposal; new beneficiary acquires asset at date of death value.
Restrictions on variations? [3]
1) Capacity required
2) Asset varied only once
3) Certain property cannot be varied (life tenancy, gifts with reservation).
Can minors or mentally incapable vary inheritance?
No, unless expensive and lengthy court application.
What happens if an asset varied more than once?
Only first variation has tax benefits.
Which property cannot be varied?
Assets from deceased life tenant or gifts made with reservation of benefit.
What is a reservation of benefit?
Gifted property still enjoyed or used by donor after transfer.
