Probate and Administration - Inheritance Tax (5) Flashcards
What is inheritance tax?
Inheritance Tax: Inheritance tax is levied on assets upon death, and must be paid according to the law. See Inheritance Tax Calculation to see how it is calculated.
(1) Pre-Grant IHT: Personal Representatives are required to pay non-instalment IHT before they can obtain the grant of representation. This may require them to locate alternative funding to cover their costs.
(2) Liability: Personal Representatives are generally only liable for assets forming part of the deceased’s estate on death, including survivorship assets. However, they may become liable for unpaid PETs and LCTs.
How is the estate valued?
Valuing Estate: The value of the deceased’s total estate minus debts and liabilities should be ascertained to establish initial liability.
(1) Banks and Life Policies: These must be calculated precisely.
(2) Other Assets: These are calculated at open market value on death, subject to exceptions.
(3) Related Property: Calculated using the related property rules.
(4) Quoted Shares: ¼ difference between highest and lowest prices on the day or closest trading day of death is added to the lowest price.
>Share was worth between 110p and 114p. ¼ difference is 1p. This is added to the lower value, giving a probate value of 111p.
(5) Unquoted Shares: Calculated using an accountant.
(6) Land and Contents: Calculated using estate agents and auctioneers.
What is the estate rate?
Estate Rate: The Estate Rate is a means to determine how much IHT is payable on each asset. This is important to determine how much IHT PRs are responsible for funding, as they are not always liable for the entire IHT burden.
(1) No Nil Rate Band: Where the deceased had fully used their nil rate band before death, then the ‘estate rate’ is 40% on taxable assets (i.e. the rate of IHT). This means the PRs pay 40% IHT on all taxable assets they are liable for.
(2) Nil Rate Band: Where the deceased has NRB remaining on death, one must calculate the effective tax rate for the total estate to determine the estate rate.
>(A) has a taxable estate worth £400,000. They have an NRB of £325,000 on death, leaving £75,000 taxable. This is taxed at 40%, a liability of £30,000. £30,000 as a percentage of £400,000 is 7.5%. The effective tax rate for the entire estate is therefore 7.5%. The PRs can therefore determine that they owe 7.5% on each asset.
What is the liability and burden of IHT (overview)?
Liability and Burden: Liability and burden determines who pays, and who owes, IHT on death.
(1) Liability: Liability is the duty to collect and pay IHT on an asset to HMRC. This is usually PRs and trustees, and cannot be altered by will.
(2) Burden: Burden determines who bears the cost of IHT, i.e. where the money is actually sourced from. This is determined by statute, but can be altered by the will.
Who has liability for IHT payment?
Liability: The liability differs by type of gift.
(1) Death Estate: PRs are liable to pay IHT on estate assets not ‘settled’ in trust immediately prior to death. Their liability is limited to the value of the estate itself.
>Technically, anyone entitled to an asset is concurrently liable to pay the IHT, but PRs will pay it in practice.
>PRs are also liable to pay IHT on reserved property if the giftee does not pay within 12 months of death.
(2) PETs: Recipients of PETs are responsible to pay IHT on any chargeable PETs.
>PRs are liable if not paid within 12 months.
(3) LCTs: The liability for IHT on LCTs differs, as the liability may increase on death.
Life: For IHT owed in life, either transferor or transferee pays. If the transferor pays, they will usually top it up to account for tax. If transferee pays, it will come directly from the gift value.
>Transferor intends to give £80,000. They will give £100,000, taxed at 20%, to effect wish.
>Transferee pays. They receive £80,000, taxed at 20%, so only receive £64,000.
Death: Any IHT added on death is paid by the trustee of the LCT.
Who has the burden of IHT payment?
Burden: The burden is determined by the transferor.
(1) Death Estate: By default, IHT on estate assets are a testamentary expense, and is funded from the residue. The will can stipulate otherwise.
Joint Property: Joint property IHT is the burden of the surviving tenants.
(2) Lifetime Gifts: Burden of lifetime gift IHT is suffered by the recipient.
How is HMRC paid?
HMRC Payment: If IHT is owed, it must be paid according to the law. This may differ if IHT can be paid by instalment (see IHT calculation).
Death Estate
Death Estate: The payment for death estate differs by option.
(1) Non-Instalment Option: Non-instalment option IHT is due within 6 months of the last day of the month of death. It is also due before grant can be obtained. Interest runs on late payment.
(2) Instalment Option: Instalment option is due in 10 equal annual instalments, the first of which is due within 6 months of the last day of the month of death. However, it is not owed pre-grant. Interest runs on late payment, and always accrues on land. If instalment property is sold, any remaining IHT is owed immediately with interest.
Application: PRs must apply to use the instalment option, it is not automatic or required.
Land: Applies to land.
Business Interest: Business interests, such as partnership shares.
Controlling Shares: Shares which give immediate control of a company on death.
Unquoted Shares: Unquoted shares if: a) worth 10% nominal value in company; b) exceed £20,000; c) IHT payable on instalment property is at least 20% total IHT; and d) immediate payment causes hardship.
PETs and LCTs
PETs and LCTs: The date of payment for PETs and LCTs differs.
(1) PETs: Due within 6 months of the last day of the month of death. May be subject to the instalment option.
(2) LCTs: Date of payment will differ for IHT due on transfer, and IHT due on death.
Transfer: If made in the first half of the tax year, 30 April the following tax year. If made in the second half, then 6 months after transfer.
Death: Due within 6 months of the last day of the month of death.
What are the sources of fundung for IHT payment?
Sources of Funding: PRs will be required to pay non-instalment option IHT prior to obtaining grant. This requires them to identify sources of funding, as they will not be able to sell the majority of estate assets without grant.
(1) Low Value Specified Savings: Specified savings not exceeding £5,000 can vest in the PR at the discretion of the account holder prior to grant (Administration of Estates (Small Payments) Act 1965).
Specified Accounts: Includes: a) National Savings accounts; b) Trustee Savings accounts; c) National Savings Certificates; d) Premium Bonds; e) Building Society accounts; f) Friendly Society accounts.
Exception: Ordinary bank savings do not apply.
(2) Chattels and Hard Currency: Chattels and hard currency may vest by virtue of death certificate alone.
(3) Direct Payments Scheme: Certain banks and building societies can pay IHT directly to HMRC from the deceased’s account. PRs must send a Form IHT423 for each account to HMRC (alongside IHT400).
Effect: HMRC will confirm payment to HMCTS (Form IHT421). This is a slow process so must be done well in advance of applying for grant.
(4) Private Payments Scheme: Banks and building societies may privately agree to pay IHT. This is quicker.
(5) Life Insurance Proceeds: Life insurance providers may privately agree to pay IHT. This is quicker.
(6) Loans: PRs may take loans to cover IHT, to be repaid from estate. Interest payments are deducted from PR income tax liability. This can be expensive.
First Proceeds Undertaking: Solicitors are often required to make a ‘first proceeds undertaking’ to repay the lender as soon as such proceeds come into their control.
(7) Heritage Property: The Secretary of State will very rarely accept property of the deceased in lieu of IHT, if it is preeminent for national, scientific, historic, or artistic interest (s230 IHTA).
Grants on Credit
Grants on Credit: If IHT cannot be paid in advance of grant, and evidence exists as such, HMRC will very rarely permit a grant to be issued on ‘credit’, to be repaid as soon as possible.
What anti avoidance legislation is IHT subject to?
Anti-Avoidance Legislation: IHT is subject to anti-tax avoidance schemes, where deemed ‘abusive’ or ‘exploitative’.
(1) Disclosure: Certain IHT avoidance schemes must be disclosed to HMRC at an early stage.
Scope: Scheme must enable a person to enable one or more of a list of specific IHT advantages to trigger notice requirements.
(2) GAAR: IHT is subject to the ‘general anti-avoidance rule’ in respect of abusive arrangements.
Arrangement: Obtaining a tax advantage must be a main purpose.
Abuse: Abusive if it cannot reasonably be regarded as a reasonable course of action.
Burden: Abuse must be proven by HMRC.
Effect: Tax advantages may be counteracted by HMRC, and arrangers prone to penalty.
