Section 4 - Inheritance Tax

Question 1

Residency and IHT

Answer 1

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)

Question 2

Estate on death

Answer 2

Assets minus liabilities plus certain gifts made in 7 years prior to death

Question 3

IHT - Shares/Collectives

Answer 3

If price sold less than market value at death, IHT based on sale price

Must be sold within 1 year of death

Question 4

IHT - Land

Answer 4

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

Question 5

IHT - Related Property

Answer 5

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

Question 6

Valuing Life Policies

Answer 6

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)

Question 7

IHT - Beneficiaries

Answer 7

As per will / rules of intestacy

Transferee / donee - person receiving the property

Question 8

Deed of Variation

Answer 8

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

Question 9

IHT - Excluded Property

Answer 9

Pension Funds
Non-UK Property Unit Trusts
OEICs
Reversionary interest in a trust
Gilts
Life Policies written under trust

Question 10

IHT - Joint Property

Answer 10

Joint tenants - survivor inherits

Tenants in common - deceased share passes according to will/intestacy

Question 11

IHT - Dying Simultaneously

Answer 11

General Law presumes eldest died first

IHT presumes died at the same time

Question 12

IHT and Transactions

Answer 12

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

Question 13

Transfers - Exempt (Lifetime Only)

Answer 13

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

Question 14

IHT Planning (Lifetime Only)

Answer 14

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

Question 15

Transfers - Exempt (Lifetime and on Death)

Answer 15

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

Question 16

Potentially Exempt Transfers (PETs)

Answer 16

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

Question 17

Taper Relief

Answer 17

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

Question 18

IHT Planning (Lifetime and on Death)

Answer 18

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

Question 19

Relief for Drop in Value

Answer 19

If value of property gifted has fallen since date of gift, then relief may be due on failed PET

Question 20

PET Admin

Answer 20

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

Question 21

Chargeable Lifetime Transfers (CLT)

Answer 21

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

Question 22

CLT Admin

Answer 22

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

Question 23

Reliefs

Answer 23

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

Question 24

Tax Planning and Reliefs

Answer 24

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

Question 25

Rates

Answer 25

£0 - £325,000: 0%
Above £325,000: 40%
CLT: 20%
Where at least 10% of net estate is left to charity: 36%

Question 26

Cumulative Principle

Answer 26

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

Question 26

Cumulative Principle

Answer 26

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

Question 27

Quick Succession Relief

Answer 27

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

Question 28

Transfers on Death

Answer 28

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

Question 29

Transfer of NRB, Residence NRB

Answer 29

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

Question 30

Gifts with Reservation

Answer 30

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

Question 31

Pre-Owned Asset Tax (POAT)

Answer 31

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

Question 32

Avoiding POAT

Answer 32

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

Question 33

Estate Admin

Answer 33

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

Question 34

Estate Planning

Answer 34

Make wills and keep updated at least every 2 years

Deed of variation - permitted up to 2 years after death

Question 35

IHT Planning - Summary

Answer 35

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