Section 4 - Inheritance Tax Flashcards
Residency and IHT
UK domiciled - IHT on all assets (whether in UK or not)
Non-UK domiciled - IHT only on property within UK
UK domiciled if resident in UK for 15 out of the last 20 tax years
If born in UK, with UK domicile of origin, and returnn to UK and become UK resident having previously become domiciled in another country will be deemed domicile for Income tax and CGT straight away
- Only deemed domicile for IHT under above rule if also been resident in UK at least 1 out of previous 2 tax years
Non-domiciles with UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes
This means their worldwide assets are then subject to IHT but full spouse exemption (basic tax-free allowance not capped at £325,000 - instead can be £650,000 if none of £325,000 was used when first partner died)
Estate on death
Assets minus liabilities plus certain gifts made in 7 years prior to death
IHT - Shares/Collectives
If price sold less than market value at death, IHT based on sale price
Must be sold within 1 year of death
IHT - Land
If price sold less than market value at death, IHT based on sale price
Must be sold within 3 or 4 years of death
To claim Loss relief (a refund of the overpaid tax if property or shares are sold at a loss):
- loss must be more than the lower of £1k/5% of death value
IHT - Related Property
Property in estate of spouse or settlement in which donor (or spouse) has interest in possession
Deemed to have transferred the value of their proportion to the total value
Valuing Life Policies
Death sum assured is part of estate if policy not assigned or under trust
If policy is transferred during its lifetime, then special valuation applied
- Total premiums paid less any sum previously paid out (surrender value used if higher)
IHT - Beneficiaries
As per will / rules of intestacy
Transferee / donee - person receiving the property
Deed of Variation
To be effective for IHT purposes:
- Must refer to the will or intestacy being varied
- Must be done within 2 years of death
- Must contain a statement that the variations is to have effect for IHT purposes
- Must be signed by all making the variation
- Must be no consideration
If all fulfilled original recipient not treated as making a transfer of value for IHT
Effectively the will or intestacy is re-written
IHT - Excluded Property
Pension Funds
Non-UK Property Unit Trusts
OEICs
Reversionary interest in a trust
Gilts
Life Policies written under trust
IHT - Joint Property
Joint tenants - survivor inherits
Tenants in common - deceased share passes according to will/intestacy
IHT - Dying Simultaneously
General Law presumes eldest died first
IHT presumes died at the same time
IHT and Transactions
Charged on gifts
Chargeable transfers - transfer of value that is not exempt
Transfer of value is reduction in donor’s estate as a result of the transfer
Gratuitous intent - no IHT on commercial transactions (no loss to the estate)
Associated Operations - provisions to combat IHT avoidance using a series of transactions
Transfers - Exempt (Lifetime Only)
Annual exemption - up to £3,000 per year / can carry forward for 1 year / only applies to lifetime gifts
Gifts on marriage / civil partnership:
- £5,000 for parents
- £2,500 for remote ancestors
- £2,500 for bride/groom to prospective spouse
- £1,000 for any other person
Small gifts - up to £250 to any person per tax year (can be used any number of times) - but not as part of larger gift / lifetime gifts only
Normal expenditure - out of income, regular and part of normal expenditure / no requirement to be fixed amount
IHT Planning (Lifetime Only)
Annual IHT exemption or normal expenditure exemption for premiums on life assurance policy written in trust, to pay:
- pension contributions
- CTF(Child Trust Fund)/JISA Contributions
Transfers - Exempt (Lifetime and on Death)
Inter-spousal -> During life and on death
If transferor is UK domiciled but spouse isn’t, then exemption limited to £325,000
Gifts for:
- education/maintenance
- charities
- national benefit
- political parties
Death on active service
Potentially Exempt Transfers (PETs)
Lifetime transfer by an individual to:
- Another individual
- Bare Trust
- Disabled Trust
No tax at date of gift
No requirement to report gift to HMRC
If donor survives 7 years, gift becomes fully exempt
Death within 7 years becomes chargeable
PET valued at date of gift
Taper Relief
0 - 3 years: 100%
3 - 4 years: 80%
4 - 5 years: 60%
5 - 6 years: 40%
6 - 7 years: 20%
Taper relief reduces the amount of tax payable, not the value of the transfer
When PETs become retrospectively chargeable, they use up the nil rate band - this increases the tax due on the estate
IHT Planning (Lifetime and on Death)
7-year DTA (Double Taxation Agreement - prevents you from being taxed in 2 countries) to cover tax due if die within 7 years
7-year LTA (Lifetime Allowance) to cover used NRB (Nil Rate Band) during 7 years
Downside, lose control of asset, but if used trust may be CLT (Chargeable Lifetime Transfer) and subject to lifetime IHT
Relief for Drop in Value
If value of property gifted has fallen since date of gift, then relief may be due on failed PET
PET Admin
No need to inform HMRC when PET made
Keep records as proof
Tax due, payable by beneficiary, within 6 months of end of month when death occurred
If CGT liable and paid by transferee, then deduct CGT paid from IHT value
Chargeable Lifetime Transfers (CLT)
Not exempt or potentially exempt
Most common is gifts into trust
Tax charge if 7-year cumulation exceeds nil rate band
14-year rule
- go back 7 years from CLT to establish Nil Rate Band available on CLT
- CLTs made in the 7 years before a “failed” PET will use nil rate band first, meaning that there could be more IHT due than anticipated on the “failed” PET (google for good examples)
20% charge on excess over nil rate band (25% if paid by donor)
On death, tax is recalculated using value of gift and 7-year cumulation at date of transfer
Tax at death rates will apply retrospectively to transfer
Taper Relief is available
Credit is given for tax paid at date of lifetime transfer
No refund will be given if too much tax was paid during lifetime
Periodic charges every 10 years - max. 6% of value in excess of available NRB
Exit charge usually based on last periodic charge
CLT Admin
Primarily charged on transferor
Tax due 6 months after end of month when transfer made
If transfer made after 5th April but before 1st October, then tax due 30th April the following year
Reliefs
Reduces value of transfer in certain circumstances
Business Relief:
- For transfer of business property owned for 2 years
- Non-qualifying assets: business wholly/mainly dealing in securities, stocks and shares or land and buildings/property subject to binding contract of sale
- 100% relief on interests in unincorporated businesses/shareholdings in AIM
- 50% relief for controlling shareholdings in fully listed companies/land/buildings or plant/machinery wholly or mainly used in connection with company controlled by transferor
Agricultural Relief:
- Includes agricultural land, crops, and farm buildings, but not animals or equipment
- Relief given on agricultural value, but not any development value
- 100% relief for owner occupied farms
- 50% relief for land let under tenancies (100% relief if tenancy exceeds 12 months)
- If agricultural and business relief are both available, then agricultural relief given first
Woodlands Relief:
- Relief for growing timber
- Relief only applies to timber and not the land itself (may qualify for agricultural relief)
- Relief only applies to transfers on death
Tax Planning and Reliefs
Consider whether to gift businesses in life/leave on death
Is income required?
Will business relief then be lost? (2-year ownership rule)
Holdover relief claim during lifetime, so no CGT on death plus 100% business relief (possibly)
Any debt used to buy business assets must be deducted from value of business before relief applied
Rates
£0 - £325,000: 0%
Above £325,000: 40%
CLT: 20%
Where at least 10% of net estate is left to charity: 36%
Cumulative Principle
All chargeable transfers over 7-year period are added together
Tax is payable once the nil rate band is exceeded
A transfer drops out of cumulation once it is more than 7 years’ old
Transfers over 7 years old may still be relevant for PETs within 7 years
On death, the value of the estate is added to the value of the chargeable transfers
Cumulative Principle
All chargeable transfers over 7-year period are added together
Tax is payable once the nil rate band is exceeded
A transfer drops out of cumulation once it is more than 7 years’ old
Transfers over 7 years old may still be relevant for PETs within 7 years
Quick Succession Relief
If property in estate had been received by a chargeable transfer in the 5 years before death, then the tax charged in death is reduced by a percentage of IHT paid on the previous transfer.
Up to 1 year: 100% Relief
1 - 2 years: 80%
2 - 3 years: 60%
3 - 4 years: 40%
4 - 5 years: 20%
Percentage only relates to the tax on the net increase in estate on the 2nd person dying
Transfers on Death
IHT is charged as if deceased made a transfer of value of estate immediately before death
Rate is 40% of excess over NRB
Reduced to 36% if 10% of net estate is left to charity
Double benefit if leave gift in will for charity - tax exempt and may reduce tax rate
Transfer of NRB, Residence NRB
Unused NRB can be transferred to surviving spouse
Expressed as % of NRB
Transfer is claimed on 2nd death
Upper limit of 100%
Max. entitlement = double NRB
Main residence NRB came into effect in April 2017
- To protect family home - available where left to direct descendant
- Now worth £175,000
- Can be transferred. (Remember, it’s the unused proportion of the band from the first death that’s transferred and applied to the band in place at second death - not the actual band from the first death)
- No min. ownership period
Gifts with Reservation
If donor retains benefit, then value treated as remaining in donor’s estate
But transfer of value at date of gift may be chargeable
So may incur double IHT charge - generally tax paid at date of gift is offset against tax payable on death
Gift with reservation only affects IHT
Pre-Owned Asset Tax (POAT)
Income tax charged on benefit of having free or low-cost enjoyment or use of certain assets formerly owned
Annual cash value quantified and treated as addition to taxable income
Assets include:
- Land including living accommodation
- Chattels
- Intangible assets comprised on a settlement where the settlor remains an interest
No tax charged in any year if the benefit is below £5,000
If person pays for benefit, then this amount is deducted from the taxable cash value
POAT applies to all disposals post 18/03/1986
Applies to UK residents
Generally former owners will not be regarded as enjoying a taxable benefit if they retain an interest consistent with their ongoing enjoyment of the property
Avoiding POAT
Elect for asset to be subject to IHT on death (complete form IHT 500)
May be preferable to suffer income tax but achieve IHT saving
Estate Admin
Liability of legal personal representatives
Grant of representation is not given until tax is paid
IHT due 6 months after end of month when death occurred
Estate Planning
Make wills and keep updated at least every 2 years
Deed of variation - permitted up to 2 years after death
IHT Planning - Summary
Ensure have sufficient income and capital for own needs before making gifts
Share assets between spouses/although can transfer unused percentage of NRB
Limit of £325,000 on inter-spousal transfers if non-UK domiciled
PETs:
- No IHT lifetime charge on PETs over NRB
- Consider GCT consequences of gift
- Consider 7 year decreasing term assurance to cover liability on premature death
CLTs:
- Discretionary trusts suitable where advantageous to remove asset from estate but beneficiary unknown
Business Relief and Agricultural Relief:
- Relief could be lost on inter-spousal transfer
- Shares need to be held for 2 years to qualify for business relief
- 100% business relief removes incentive to make lifetime gifts of family business
IHT and Trusts:
- Advantages of trusts - provide cash whilst probate being obtained/Settlor can be trustee so retains control
- Bare trust - make outright gifts so donor uses NRB
- Discretionary trust - make gifts within NRB
Additional Points:
- NRB frozen at £325,000 and £175,000 until end of 2025/26
- Where at least 10% of net estate is left to charity - reduced rate of IHT (36%) applies
