Tax

Question 1

Lifetime Gifts

Marriage Gift Exemption

Answer 1

• Parent to their own child - £5k
• Party to marriage to the other - £2.5k
• Remote ancestor (ie. grandparent, but not aunts/uncles) - £2.5k
• Any other cases - £1.5k
• Includes the parent-in-law giving a gift to the child-in-law.
• Can be claimed alongside AE.

Question 2

Lifetime Gifts

Normal Expenditure out of income

Answer 2

Requirements:
* Needs to be made from donor’s income;
* Form part of a normal/regular pattern of giving; and
* Not affect the donor’s standard of living.
* No upper limit on amount exempt so long as requirements are satisfied.

Question 3

Lifetime Gifts

Annual Exemption

Answer 3

£3,000 per year
* Also add unused AE from past tax year (maximum amount claimable - £6,000)

Question 4

Lifetime Gifts

Small gifts allowance

Answer 4

• Any single gift not exceeding £250 per year per donee.
• If any gifts to the same person in that same tax year (April 6 to April 5
  2023-24) - not entitled to benefit at ALL from the small gifts exemption. .
• No limit on the number of small gifts to different recipients.

Question 5

Lifetime Gifts

Family maintenance exemption

Answer 5

Regular payments made to:
* Spouse - relevant where the spouse, as the recipient, is domiciled abroad, so spousal exemption does not apply.
* Minor children (including stepchildren) for maintenance and education;
* Adult children in fulltime education/training; or
* Dependent relatives for reasonable provision of care.

Question 6

Lifetime Gifts

Taper Relief

Answer 6

Where the transfer took place 3-7 years before death, reduction in IHT is due:
i. 3 to 4 years - 20%
ii. 4 to 5 years - 40%
iii. 5 to 6 years - 60%
iv. 6 to 7 years - 80%

Question 7

Death Tax

Above what net estate value is RNRB not claimable?

Answer 7

Net estates over £2,350,000 do not qualify.

Question 8

Death Tax

Above what value is RNRB tapered?

Answer 8

If net value (after all deductions are made) is more than £2 million
* Available RNRB decreases by £1 for every £2 above 2mill.

Question 9

Death Tax

When will RNRB not be available?

Answer 9

• Where qualifying residential interest is not left to direct descendant; or
• Left on discretionary trust - unless distribution is made within 2 years to qualifying object (S.144 IHTA)
• Left in residue where also non-qualifying beneficiaries benefit.
• Qualifying beneficiary with a contingent interest.

Question 10

Death Tax

Quick Succession Relief

Answer 10

Prevents double-taxation.

• Deduct from second Ds estate the amount of inheritance paid on first Ds estate.
• 5 years timeline between deaths.

If inherited 1 year before death, 100% relief on its value then incrementally deducts 20% per each year that passes.

Question 11

Death Relief

Woodland Relief

Answer 11

Applies to the woodland portion of the property.
* deduct value of woodlands from property’s value.
* 100% relief (CGT is deferred until woodlands are sold)

Applies if owned for at least 5 years before death.

Question 12

Lifetime/Death Transfers

Agricultural Property Relief

Answer 12

Agricultural land/buildings and farmhouses/cottages.
* If both BRP/ARP apply, use ARP.

1) Used/associated with agricultural activity.
2) Ownership period - either:
* Occupied by decesead - for 2 yrs before transfer; or
* Occupied by tenant - at least 7 years before transfer.

Where asset was transferred during deceased’s lifetime (PET), only qualify for relief if (i) transferee still owns asset; (ii) qualifies for relief.

Question 13

Lifetime/Death Transfers

Business Property Relief

Answer 13

Asset cannot have been acquired mainly/wholly as investment.

• Owned for at least 2 years, or;
• Qualifying replacement assets with a combined ownership of 2 years.

Applicable relief:
100% relief
* Unquoted/AIM listed shares
* Property consisting of a business or interest in business
50% relief
* Land/bulding/machinery owned by a taxpayer - either:
a) Company where they own controlling interest (50% or more)
b) Partnership where they are a partner.
* Quoted shares where taxpayer has control of 50% or more of the company

Note - % of ownership in company accounts for spouses’ own shares too.

Question 14

Tax Avoidance

Gifts with reservation of benefit

Answer 14

If donor retains a significant benefit / enjoyment in the property given away.
* unless reservation of benefit ceases more than 7 years before death (exempt PET).

Question 15

Tax Avoidance

Pre-owned asset charge (POAC)

Answer 15

When an individual gives away property (e.g. land/buildings, chattels, settlor-interested trusts) and subsequently benefits from that property.

• If caught, an annual income tax charge is imposed on the donor in relation to the benefit he receives from the property, unless he elects for the gift to be taxed as a GROB.
• includes both direct transfers and indirect ones (i.e. asset transferred is sold by donee and then new asset is purchase, and donor benefits from it).

Question 16

Post-Death Income Tax

Answer 16

Payable at basic taxpayer rate.
* no personal allowance claimable.
* due on any income made after death
* no reporting needed if savings income only + less than £500.

If beneficary carries right to intermediate income, once they receive it, tax will be re-assessed according to their taxpaying band.

Question 17

Post-Death Capital Gains

Answer 17

Benefit from tax-free uplifts from date of death.
* Post-death increases are chargeable.
* Can claim personal allowances (cf. income)
* Exemption from payfment for chattels if consideration is £6000 or less.

Question 18

Tax Avoidance

What is the effect of making a GROB?

Answer 18

Included in donor’s taxable estate is derived benefit up until point of death.

If reservation of benefit ceased within 7 years before death, treated as a PET on date in whcih reservation ceased.
* Penalty - AE cannot be claimed to offset tax.

Donee acquires asset at transfer value

Question 19

Tax Avoidance

Restriction on deduction of loans

Answer 19

Cannot deduct loan made to acquire qualifying asset (i.e BPR/APR) from asset’s value that has been left unpaid.
* HMRC will take close look at loan made between family members.

Question 20

Tax Avoidance

GARR

Answer 20

Rule against aggressive tax avoidance.
* applies if arrangement is abusive - cannot be regarded as a reasonable course of action.
* HMRC has discretion to make just and reasonabel adjument to tax due.
* further deterrest - impose a penalty of up to 60% on adjusted taxed amount.

Question 21

Tax Avoidance

Disclosure of Tax-Avoidance Scheme (DOTAS)

Answer 21

Duty on promoters of tax arrangement to inform HMRC of notifiable arrangements and proposals.
* includes solicitors

IHT planning is not notifable under DOTAS
* covers covert arrangement - not simply using LCTs/PETs for tax-efficiency.

Question 22

Death Tax

Related Property Rules

Answer 22

If assets are worth more as a collection, take proportionate share of collection’s value (not standalone asset).

Question 23

Death Tax

What assets are excluded from a deceased’s taxable estate?

Answer 23

• Life interest in an intervivos trust
• Discretionary trust where the deceased is an object
• Insurance policy written on trust
• Pension scheme nominations
• Remainder interest in life interest trust where life tenant is stil alive.

Question 24

Tax Planning

What happens where a deceased leaves 10% or more of their estate’s value to charity?

Answer 24

Death tax is reduced to 36%

Question 25

Tax Planning

How is grossing up relevant when advising a client on specific gifts?

Answer 25

If a non-exempt beneficiary is given a specific gift “free of tax” but the residue is left to an exempt beneficiary, the ultimate value of the gift will be: (i) amount specified in will and (ii) inheritance tax due on that amount.

• Consequence - total gift amount may be more than what testator intended.
• Note - residue still pays IHT, but means residual benficiary may get less than testator foresaw.

Question 26

Tax Planning

When might setting up a discretionary trust be suitable for a client?

Answer 26

No direct tax benefit
* Helps isolate trust assets from beneficiaries’ creditor and spouses in divorce proceedings.
* Flexibility in chosing who should benefit (can draft letter of wishes, albeit not binding).

Effect of s.144 IHT - all distributions occuring within 2 years of death are treated as having been made by deceased.
* Spouse/charity exemption can be claimed
* RNRB if criteria is met.

Question 27

Tax Planning

When might setting up a life interest will trust be suitable for a client?

Answer 27

• Note - no spousal exemption if spouse is remaindermand.
• benefit is ability to control destination of estate (particularly if children form previous marriage)

Important to consider size of life trust.
* Default tenant can only receive income.
* Trustee powers can be amended to provide for advancement of capital/making loan to LR).

Question 28

Tax Planning

How can an unmarried couple mitigate the effect of bunching?

Answer 28

Double-tax burden of IHT may arise since no spousal exemption applies.
* solution is to make a discretionarry trust where children are named as objects alongside surviving partner.
* when surviving partner dies, discretionarry trust will not be included in their taxable estate.

Best to avoid lifetime trust as where created by will, life tenant is now taxed on valye of trust on their death.
* solution - create intervivos lifetime trust before to avoid rule.