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SQE 1 FLK 2 > Tax 3: Inheritance Tax > Flashcards

Tax 3: Inheritance Tax Flashcards

1
Q

What is the bill-rate band for IHT? How does this effect the tax payable?

A

£325000

This amount will be subject to 0% tax.

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2
Q

What is the effect on IHT payable for UK domiciles and non-UK domiciles?

A

UK Doms
- liable for IHT on transfers of all worldwide assets

Non-Doms
- liable only on transfers on UK assets

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3
Q

Are transfers for less than market value taxable for IHT?

A

Only if they have gratuitous intent
- so not if with unconnected person
- only liable if they intended to make a gift

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4
Q

What are expenditures on family maintenance and how are they taxed for IHT?

A

Includes
- school fees for children
- provisions to look after dependant relative or former spouse

These are not treated as gift and are not subject to IHT

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5
Q

How are transfers/gifts valued for IHT?

A

Using loss to donor principle
- measure size of gift by how much it reduces the donors estate

Related Property
- means similar property held by spouse
- if an asset has a higher value taking into account related property owned by spouse then the asset is valued at that higher amount (eg the amount each share is worth due to partner holding some as well)

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6
Q

How might you value shares in small/unlisted company for IHT purposes?

A

Using loss to donor principle
- but value of shares is likely dependant on how much the shares (control) you own

Value of shares before giving them away (likely more per share) ((minus)) value of shares remaining after transfer (likely less per share)

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7
Q

How can transfers be categorised for IHT purposes?

A
  • Chargeable lifetime transfers
  • Potentially Exempt Transfers (PET)
  • Exempt Transfers
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8
Q

What are the exempt transfers (generally)?

A
  • gifts to spouse
  • gifts to charities
  • small gifts
  • gifts on marriage
  • normal expenditure out of income
  • ((an annual exemption))
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9
Q

How are gifts to spouses taxed for IHT?

A

Gifts on death or during lifetime are generally exempt from IHT.

Exception
- if donor spouse UK-Dom and recipient spouse is NON-Dom
- here only first £325,000 of transfer is exempt

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10
Q

How are gifts to charities taxed for IHT?

A

Fully exempt if charity is in UK or European Economic Area

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11
Q

When might a small gift be exempt from IHT? What are the rules?

A

Can make 1 gift of up to £250 to any donee per tax year.
- does not apply if gift exceeds £250

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12
Q

How are gifts on marriage taxed for IHT?

A

Applies to wedding presents and apply to gifts to couple
- cannot get two exemptions for 1 gift to groom and 1 to bride
- not all or nothing so can give gift exceeding limit where only excess will be taxed

Exempt Amounts
- a parent - up to £5k
- grandparent - up to £2.5k
- between bride and groom (before wedding) - up to £2.5k
- all others - up to £1k

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13
Q

How are normal expenditures out of income taxed for IHT?

A

Exempt

Must be:
- habitual (year after year)
- made out of donor’s income
- donor must have sufficient income to maintain their normal standard of living (no limit)

Examples:
- life assurance policy or personal pension premiums paid out by donors in respect of another
- regular cash gifts (Christmas or b-days)

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14
Q

What is the annual exempt amount? How is it applied?

A

£3k per year and applies outside other exemptions.

Unused annual exemptions can be carried forward 1 year

Applies to gifts in chronological order

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15
Q

What is a potentially exempt transfer for IHT (general)?

A

Is a gift by one individual to another that is not covered by an exemption (in full or part)

Treated as exempt whilst donor is alive and will only become taxable if the donor dies within 7 years of making gift.

Tax is then payable by the recipient

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16
Q

Who has pay IHT on a PET and when?

A

Only if donor dies within 7 years of making gift.

Recipient then has to pay gift.

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17
Q

How is a PET valued for IHT?

A

The value of the gift (minus) any exemptions available to donor at time of making.

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18
Q

What are chargeable lifetime transfers and list them?

A

Transfers that not exempt of potentially exempt and immediately liable for IHT
- gifts to trusts (excluding charitable and bare trusts)

  • gifts to companies
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19
Q

What may reduce the amount of IHT for CLTs?

A
  • CLTs can be reduced by any available annual exemptions (left over after other CLTs or PETs)
  • nil rate band for CLTs (£325k) but this applies to all CLTs made in a 7 year period. So must reduce the nil rate band by earlier CLTs made within 7 years of the one in question.
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20
Q

What is the IHT tax rate on CLTs?

A

If trustee is paying 20%

If donor is paying 25%

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21
Q

How to calculate the gross amount transferred for CLTs over 7 year period to calculate nil rate band?

A
  • must include the value transferred plus any tax paid on the transfer by the donor (loss to the donor principle)

This is unless trustees pay the tax

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22
Q

How to calculate IHT on PETs on death?

A

Use nil rate band and tax rate on date of death.

  1. work out nil rate band remaining
    - deduct any gross transfers made 7 years before Transfer of PET (not death)
  2. tax due on amount of PET exceeding remaining bill rate band (40%)
  3. If there is more than 3 years between PET and death taper relief may apply to reduce the tax payable
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23
Q

How much is taper relief for IHT on PETs/CLTs on death?

A

0-3 years = 0
3-4 = 20%
4-5 = 40%
5-6 = 60%
6-7 = 90%

This reduces the tax payable by X%

Does NOT reduce amount taxable

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24
Q

How to calculate IHT on CLTs on death?

A

If donor dies within 7 years of making CLT the recipient has to pay additional inheritance tax.

  1. Calculate amount of nil rate band remaining
    - deduct any gross transfers made 7 years before CLT (not death)
    - use fresh nil rate band (forget about lifetime tax) (so minus £325k or less if other subtractions)
  2. 40% due on amount exceeding nil rate band
  3. taxable amount reduced by taper relief
  4. taxable amount reduced by life time tax paid when CLT was originally made
    - does not matter who paid the tax
    - if life time tax exceeds inheritance tax then 0% due but no refunds
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25
Q

To what types of transfers does business or agricultural relief apply? When in the calculation is it applied?

A

To PETs and CLTs or on death

Relief applied before any annual exemption and given automatically if conditions are satisfied?

26
Q

How much is business relief (as in percentage)?

A

Depends on the business property.

100% for:
- a sole trade or partnership interest;
- shares in an unlisted trading company (any amount of shares).

50%
- shares in quoted trading company if donor has voting control (ie over 50% of ordinary shares);
- land, building or plant/machinery owned by an individual and used either by partnership they are partner in or company they control

27
Q

What types of business are excluded from business relief for IHT?

A

Business whose trades to make or hold investments or deal in property
- includes one that holds property for rental income or as investment

Mixed businesses
- business that hold some assets as investments are permitted but relief is only applicable for companies trading asset proportion

28
Q

Are overseas businesses eligible for business relief?

A

Yes

29
Q

What are the rules of ownership for business relief?

A

Donor must have owned it for 2 years before transfer.

Exceptions
- if you have replaced one business property asset with another within 3 year period
- if inherited from a spouse

30
Q

What property is included in agricultural relief?

A

Generally for agricultural land and agricultural buildings used for purpose of agriculture.
- in UK, Channel Islands, Isle of Man and EU Economic Area

Use
- can either be using property for own business
- be landowner who is letting out land or buildings to farmer

31
Q

What types of use for land are not agricultural for purpose of IHT agricultural relief?

A
  • grazing ground for horse (unless stud farm)
  • fishing, shooting and other sports
32
Q

What are the ownership requirements for agricultural land for IHT agricultural relief?

A

If using land for own agricultural business
- owned it for 2 years prior to transfer

Tenanted land
- owned for 7 years prior to transfer

33
Q

Can you apply for both agricultural and business relief?

A

Yes - agricultural will have priority and apply to agricultural value of property

Bussines relief
- may be available on any other assets used in farming business that are not agricultural land or buildings (plant and machinery, goodwill etc.)

34
Q

How much is agricultural relief worth?

A

100%

35
Q

When is agricultural/business relief taken into account?

A

for CLTs relief is immediate as they are immediately chargeable

For PETs simply have effect on death as with normal inheritance tax situations

36
Q

How do you calculate IHT on death?

A

No annual exemptions apply

  1. Calculate Net Value of Estate
    - total value of all assets owned (minus) debts, liabilities owed and funeral expenses (but NOT probate costs)
  2. Calculate nil rate band
    - subtract CLTs and PETs going back 7 years from death
    - exempt gifts will not count towards nil rate band
  3. subtract remaining Nil Rate from Net Value
37
Q

What are exempt gifts for death tax (IHT) purposes?

A

Gifts to spouse
- unless deceased was UK-Dom and spouse is Non-Dom then restricted to £325k

Gifts to Charity in UK or European Economic Area

38
Q

How are assets valued for IHT purposes after death?

A

Generally at open market value at date of death

Quoted Shares
- valued according to official Stock Exchange list published at date of death

Jointly Owned Assets
- if owned jointly by spouses then exactly 1/2 (due to related property rules)
- if not spouse then typically less than half (between 5% - 15% less)

39
Q

How much is inheritance tax?

A

40%

Exception
- 36% if 10% or more of baseline amount of estate is left to charity

40
Q

How does giving to charity reduce the IHT owned?

A

IHT taxed at 36% if 10% or more of baseline amount of estate is left to charity

Base line amount
- means value of estate after deducting reliefs, exemptions and available Nil Rate Band

41
Q

What are the rules for gaining and using a transferable nil rate band?

A

Can take unused nil rate band left by a spouse.
- claim must be made by PRs of second spouse to claim the transferable nil rate band

Transferable nil rate band cannot be used for the life time tax owed on a CLT

42
Q

How is a transferable nil rate band transferred if the nil rate band amount has changed between the death of the 1st spouse and the 2nd?

A

Done as a percentage
- so if spouse 1 only used 10% of their nil rate band
- spouse 2 will have their nil rate band increased by 90%

43
Q

Can you claim for the transferable nil rate band of more than one former spouse (if you survived more than one spouse)?

A

Yes can claim the percentage increase of more than one spouse.

However, this is capped to a 100% uplift (so cannot more than double your current nil rate band)

44
Q

What is the residential Nil Rate Band and when is it available?

A

Available if
- estate includes home that was at some point used as deceased’s private residence; and
- the residence or proceeds of residence are left to lineal descendants

Lineal Descendants
- children (step, adopted and foster)
- grandchildren
- spouses of the above

45
Q

How much is the residence nil rate band?

A

Currently £175,000

46
Q

What may reduce the amount of the Residence Nil Rate Band?

A

Tapered for Estates Exceeding £2m in net value
- goes down £1 for every £2 over the limit
- net value is assets less liabilities before deducting reliefs (business/agricultural) and exemptions (spouse/charity)

47
Q

Can residence nil rate band be transferred?

A

Unused residence nil rate band can be transferred between spouses.
- recipient can claim the percentage not used by spouse as an uplift to their own
- can claim this from more than one spouse up to a max of 100% increase

Tapering
- the transferred allowance is tapered where the donors estate exceeded £2m

48
Q

What is downsizing relief in relation to Residential Nil Rate band?

A

Where deceased has downsized home to less expensive
- this may mean estate would not longer be able to take advantage of full Residential Nil Rate Band (£175k) if home (or portion going to lineal descendant is under this)
- Can claim for increase of Nil Rate to what it would have been for old home

49
Q

What is Quick Succession Relief?

A

Where individuals estate has been increased by chargeable transfer made to them in last 5 years
- such as gift in will or PET

Relief need not be calculated for SQE but it will decrease by 20% each year

No requirement that gifted property is still owned by the deceased at date of death

50
Q

What is Post-Mortem Relief?

A

When claims are made to substitute lower value for certain assets in death estate, which have been sold by PRs

Quoted Shares
- relief available if PRs sell quoted shares, unit trusts or shares in open ended investment companies for a loss within 12 months of date of death
- aggregate all profits and losses in 12 month period and claim back any resulting loss

Land and Buildings
- for sale within 3 years of death (plus any losses in 4th year but not profit)
- calculate by aggravating all gains and losses in 3 year period and claim for resulting loss

Woodland Relief
- if deceased’s estate that is not eligible for agricultural/business relief but has trees and underwood
- deceased must have been beneficially entitled to land for five years prior to death (or inherited it from another)
- relief excludes value of woodland from estate
- liability for IHT is deferred until woodlands are disposed of

51
Q

What are the anti avoidance rules for IHT (general)?

A
  • gifts with reservation of benefit
  • pre-owned asset tax
52
Q

What are the IHT effects of gifts with reservation of benefit?

A

Treated as still part of deceases estate

Exception
- if donor pays market rent
- if remaining benefit is insignificant
- donor releases reservation before death (becomes PET on date of release with value at that date)
-

53
Q

When might double taxation effect gifts with reservation of benefit? How can this be resolved?

A

In rare circumstances gifts with reservation of of benefit may result in double taxation
- house given as PET, donor continues to live there and dies within 7 years

Here HMRC will grant double taxation relief and tax at whatever is the higher rate.

54
Q

When does Pre-Owned Asset Tax apply? What is its effect?

A

Imposes income tax charge on benefit received by former owner of a property if:
- former owner benefits directly or indirectly from an asset they previously owned; and
- the transfer is not within the gifts with reservation of benefits rule

for example gifting someone house who sells it and buys a different house that you then live in.

55
Q

CLT: when is IHT due? Who is liable? (life tax and death tax)

A

CLT Lifetime tax
- later of 6 months from end of month in which CLT was made; and
- 30th April after tax year in which it was made

  • can be paid by transferor or trustee
  • if donor does not pay HMRC pursues recipient

Tax on Death
- due 6 months after end of month in which death occurred
- liability falls on trustees (but burden on trust fund)
- PRs will be liable if it remains unpaid after 12 months

56
Q

PET: when is IHT due? Who is liable?

A

Due
- 6 months from end of month of death
- recipient is liable and suffers burden
- if not paid within 12 months PRs liable

57
Q

Transfers on Death: when is IHT due? Who is liable?

A

Due
- 6 months from end of month of death

Liability depends on property
- Freehold estate: PRs liable (burden on residue unless otherwise provided)

  • Trust property in which deceased has interest: trustees liable (burden on trust assets)
  • Gifts with reservation of Benefit: donee of gift liable (PR if unpaid for 12 months)
  • Property not passing under will/intestacy: PR liable (burden on beneficiary)
58
Q

How does IHT have to be paid?

A

Either lump sum; or

Can make claim with HMRC to pay in 10 equal instalments
- first instalment due 6 months from end of month of death

59
Q

What tax planning steps can you take to minimise IHT?

A

Make lifetime gifts
- especially good for appreciating assets as taxed at value at date of transfer

Use annual exemption

Use transferable nil rate band

Invest in business or agriculture property

60
Q
A

SQE 1 FLK 2 (91 decks)

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