Tax Flashcards
What lifetime transfers are usually immediately chargeable when made?
To a trust or to a company
For lifetime transfers that are immediately chargeable what are the tax rates?
Will owe tax after nil rate band (£325,000) used up.
Tax rate is 20% if paid by trustees from funds gifted to the trust or 25% if paid by the donor.
Must consider other lifetime transfers chargeable immediately made in last 7 years and add to current gift to work out if nil rate band has been exceeded.
What happens if donor dies within 7 years of making a CLT?
The trustees will owe additional IHT on the CLT.
To calculate will apply the remaining nil rate band to see what amount is chargeable to 40% IHT. Taper relief is available if more than three years between date of the CLT and the date of death. Trustees will receive credit for the lifetime tax already paid on the CLT.
Note: if lifetime tax paid exceeds the tax on death the trustees cannot get a refund.
What is the timescale for payment of IHT owed on a CLT on transfer and on death?
IHT is due the later of six months from the end of the month in which the CLT was made and 30 April after the tax year in which it was made.
If additional tax owed on death this is due 6 months after the end of the month the death occurred and this is payable by the trustee.
What are Potentially exempt transfers (PETs)?
Lifetime transfers to an individual are not chargeable immediately but becomes so if made within 7 years of the donor’s death.
What is taper relief?
Available to reduce the tax owed by 20% for each year prior to 3 years from the date of death.
Calculation for IHT on death?
- Subtract the amount of PETs and CLTs made within seven years from the nil rate band.
- If any nil rate band remains deduct that from the net amount of the death estate.
- Charge 40% on rest of the death estate.
For IHT when are assets valued at?
Value of an asset at the date of death is its open market value.
What is the rule for valuing jointly owned property?
if jointly owned property this is considered when valuing so if jointly owned with someone other than spouse or civil partner will usually be partially discounted because of difficulty selling such an asset.
What is a gift with reservation of benefit?
if individual gives an asset away but continues to be able to benefit from it then the gift is treated as being in the donor’s estate when they die.
Common example giving away a house but continuing to occupy it. Rule doesn’t apply if donor pays the recipient market value for use of the gifted property. If does release benefit, then treated as a PET on the date of release. Donee of gift is primarily liable for IHT on this but if not paid within 12 months after death then PRs become liable.
When isn’t it a gift with reservation of benefit?
Rule doesn’t apply if donor pays the recipient market value for use of the gifted property. If does release benefit, then treated as a PET on the date of release.
Donee of gift is primarily liable for IHT on this but if not paid within 12 months after death then PRs become liable.
What lifetime gifts are fully exempt from IHT?
- Spousal – gifts to spouse or civil partner
- Gifts to charities
- Gifts of £250 or less to anyone without limit to number of recipients (all or nothing so a gift over £250 is not exempt at all)
- Wedding gifts – from parent up to £5,000; grandparent £2,500; bride to groom or vice versa £2,500; all others £1,000 (these not all or nothing)
- Normal expenditure out of income – such as a Christmas present, gift cannot affect the donor’s normal standard of living, but not limited by a specific amount.
- Annual exemption of £3,000, this can be carried forward one year then disappears, set against gifts in chronological order in the tax year
What is the rule for reducing IHT rate through gifts to charity?
Exempt if on death gives more than 10% of baseline amount to charity then IHT rate is reduced from 40% to 36%.
Baseline amount is the value of the estate after deducting all available reliefs, exemptions and nil rate band but not the charity legacy itself.
What amount is the nil rate band?
£325,000
When is the residence nil rate band reduced?
If estate net value over £2 million the residence nil rate band is tapered away by £1 for every £2 over that limit. Net value is assets less liabilities but before deducting reliefs.
