Session 3 Flashcards
What is a PET and LCT?
PET:
Lifetime transfer of value to another individual
1) not chargeable at the point it is made, no IHT
2) if the transferor survives 7 years from Making PET- exempt
3) if the transferor died within 7 years of making the PET it ‘fails; and becomes chargeable
LCT:
Lifetime transfer of value into a trust
Chargeable when made- IHT payable on the chargeable value at 0/20%
If transferor survives- no further charge
if they die within 7 years- reassessed at 40% (or 0)
What is the 7 step formula for assessing IHT on lifetime transfers?
1) calculate cumulative total
2) identify value transferred
3) apply exemptions and reliefs
4) apply NRB and calculate tax
5) Apply taper relief
6) give credit for tax paid in lifetime.
5&6 only apply when IHT is calculated after death
step 1- calculate cumulative total
Cumulative total = chargeable value of chargeable transfers made in previous 7 years in the transfer being taxed.
Have to look at chargeable transfers made in 7 years before a chargeable transfer.
Step 2- identify value transfers
chargeable value- value of a chargeable transfer after exemptions and reliefs have applied.
Assessed by considering the loss to the donor at the date of the transfer.
If cash is transferred the loss to the donor is the same as the fain to the donee.
For other assets, the market value at the date of the transfer will often be the same as the loss to the transferor/value recieved by the donee. If less than full consideration- loss to the donor is the difference between market price and valued paid.
Be aware of ‘grossing up’ if the donor pays tax. If IHT is payable when an LCT is payable and the donor pays it alongside the gift, the value of the donors estate is going to include the amount of IHT paid, as well as the value of the gift itself
Step 3- apply exemptions and reliefs
Different reliefs:
1) spousal exemption
2) charity exemption
3) family maintenance exemption
4) annual exemption (£3000) (up to two years of unused annual exemption)
5) small gifts allowance (£250)
6) normal expenditure from income
7) marriage exemption (different for different recipients) (£5,000 if their own child- only £1000 otherwise)
8) business property relief
9) agricultural property relief
The value of the transfer after applying exemptions/reliefs is the chargeable value.
Step 4- Apply NRB and calculate tax
Apply the NRB-
Establish the value of the NRB (reduce by cumulative total from Step 1)
Apply a rate of 0% to the amount of available NRB
Apply 20/40% to the remaining balance to find the IHT due
The transferrable NRB is not relevant until the donors death, but, when lifetime transfers are chargeable following the donors death, the TNRB can be used against lifetime gifts.
Residence NRB never applies to lifetime transfers.
NRB applicable to an LCT when it is made is the NRB at the date of transfer
NRB applicable to a failed PET/reassessed LCT is the NRB at the date of death
Steps 5 and 6- reassessed transfers
Step 5- taper relief- Should be considered for failed PET )made at least 3 years before death)
and Reassessed LCT (made at least 3 years before death) . Taper relief does not apply unless there is tax payable on the lifetime gift. Reduces the amount of tax payable- by percentage of years the donor has survived after making that gift.
Step 6- credit tax already paid- IHT paid on an LCT when it was made can be credited against IHT due after death if the LCT is reassessed- only the balance needs to be paid to HMRC.
Credit is given after taper and balance due may be 0 (so no further tax is due)
How do you calculate IHT on death?
1) Calculate cumulative total
2) identify assets included in taxable estate
3) value taxable estate
4) deduct debts/expenses
5) apply exemptions and reliefs
6) apply RNRB
7) apply basic NRB and calculate tax
Step 2- identify assets included in taxable estate
1) all assets and interests in property an individual may have which are potentially subject to IHT.
excluded:
A lump sum policy that is a lift insurance policy written in trust
A discretionary, lump sum payment will not be included in the taxable estate.
If a remainderman dies, and the life tenant is still alive, the remainder interest is not subject to IHT.
However, if the life tenant of a life interest trust which was created before march 2006 or followed created someone’s death- if that life tenant dies, that life interest will be included
If there are any discretionary trusts, these will be excluded.
step 3- value the estate
if assets are owned by spouses and they are worth more when valued together because they form a set- each parties share is valued on death as a proportionate share of the combined total.
Where land/building are co-owned the proportionate value of the joint share is reduced by 10%- this does not apply where the co-owners were married
Step 4- deduct debt
these are deducted before IHT- funeral expenses and tombstone costs are deducted before IHT, even though these costs are incurred after death.
Step 5- apply exemptions and reliefs
available: spouse exemption, charity exemption, business property relief, agricultural property relief.
Spouse exemption applies 100% on anything going to them.
If they have a trust in their will and the spouse is the life interest- spousal exemption will apply.
For business relief and or agricultural property relief, the rate of relief is either going to be 50% or 100%.
step 6- residents nil rate band
apply this at 0%- current rate is £175,000. If the value of the qualifying residential interest is lower than £175,000 then the amount of the band, is the same as the property.
It has restrictions, has to be a qualifying residential property and inherited by a direct lineal descendant.
This means the deceased home, or in an interest in their home. Expressly exclude commercial and let property. Closely inherited means absolutely, includes deceased children, grandchildren etc.
IF they had a spouse before who did not use their RNRB at their death, then the unused portion can be claimed by the survivors estates.
It is reduced for the estate if worth over £2 million. No band available for estates worth over 2.35 million
Step 7- apply basic NRB and calculate tax
The basic NRB is £325,000. does the deceased have a spouse who died before them who did not use any/all of their NRB? That can be transferred.
Also remember to remove any value of cumulative total
Above that band is taxed at 40%
What are the different ways of taxable planning?
1) transfer assets between spouses as it qualifies for spousal relief
2) family maintenance.
3) marriage allowance
4) annual exemption
5) small gifts allowance
6) gifts out of income- this is transfers out of their income in a regular, normal pattern. Also should not affect the donors standard of living
7) charity exemption
8) BPR/APR
BPR: applies to the value of qualifying business assets- timing requirements: must have been owned for 2 years immediately prior to death. Different rates: unquoted shares qualify for 100% relief- quoted shares only qualify for 50% relief if the shareholder has control of the company.
APR- applies to land and buildings connected with the land- farmhouses and cottages provided they are of a character and linked to the land. 2 years throughout immediately before transfer or owned by transfor and let to someone else for 7 years prior to death. 100% relief if the owner was occupier or would be entitled to vacant possession within 12 months from the date of transfer, or the property was let on a tenancy beginning on or after 1st sept 1995. 50% otherwise.
APR takes precedent over BPR.
Life insurance policy in trust- this means the value of the policy will be outside the estate.
If the taxpayer has an interest in excluded properties, ef a reminder beneficiary of a life interest trust- could consider transferring their remainder interest to a non-exempt beneficiary whilst the life tenant is still alive- not treated as a PET as they receive no vested interest whilst life tenant is still alive
Benefits under a discretionary pension scheme are also outside of the taxable estates- nominate a non exempt beneficiary so they do not get paid to their estate
Lastly, could make PET or discretionary trusts
