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Wills & Administration of Estates > Tax planning and anti avoidance > Flashcards

Tax planning and anti avoidance Flashcards

1
Q

What is the difference between tax avoidance, aggressive tax avoidance, and tax evasion?

THIS TOPIC IS QUITE WEIRD MAYBE GO THROUGH LECTURE WHEN YOU REVIEW CARDS

A
  • Tax avoidance = efficient and lawful arrangement of a client’s affairs in a manner which minimises liability to tax
  • Aggressive tax avoidance = complex/artificial arrangements which have overall effect of reducing tax liability (not a criminal offence, but do not reflect intention behind the law)
  • Tax evasion = unlawful withholding of information about assets/income or otherwise taking steps to avoid tax they are liable for
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2
Q

What are the 5 anti-avoidance rules?

A
  1. Restriction on deduction of loans (step 4 of IHT calculation) for IHT purposes
  2. Gifts with reservation of benefit (GROB)
  3. Pre-owned assets charge (POAC)
  4. General anti-abuse rule (GAAR)
  5. Disclosure of Tax Avoidance Schemes (DOTAs)
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3
Q

What is the restriction on loans made for assets attracting BPR?

A

If loan made to acquire, maintain or enhance the BPR assets (or agricultural/woodlands relief), the loan must be set off against the value of the qualifying assets
when valuing for IHT purposes

Difference between loan and value of qual assets that gets relief

E.g. shares worth £100,000 and outstanding debt of £25,000 which was used to purchase shares.

  • Deduct £25,000 at deducting debts step
  • Deduct £75,000 (rather than £100,000) from the shares as the loan has been set off against the qualifying assets
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4
Q

What if the loan exceeds the value of the relievable assets?

A

The remainder can be deducted from the value of the chargeable estate

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5
Q

What is the restriction on loans which are not repaid from the estate?

A

Loans only deducted if they are actually repaid - debts owed to deceased’s family, related trusts or companies and those made as part of tax avoidance arrangements looked at more closely by HMRC

E.g. Woman lends brother £200,000 to help him buy house, brother dies without paying any back and woman tells her brother’s executors that she does not want to enforce the debt = debt cannot be deducted from the value of the man’s estate

Commercial arrangements expected to be repaid (HMRC does not check)

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6
Q

What is the purpose of the GROB rules + what is their effect?

I.e. How do they treat the property

A
  • Prevents individuals giving away property during lifetime but retaining a personal benefit in that property
  • Treat property as remaining part of donor’s estate ensuring it is taxed upon death
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7
Q

What are the 2 situations in which GROB rules apply?

A
  1. Donee does not assume ‘bona fide possession’ of property at/before start of relevant period
  2. At any time during relevant period, property is not enjoyed to (virtually) the entire exclusion of the donor and of any benefit to him
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8
Q

What is the ‘relevant period’ in the GROB rules?

A

The 7 year period before donor’s death (shorter if gift made less than 7 years) - not 7 years after gift made

Means gifts can be caught by GROB rules years after made if donor reacquires interest

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9
Q

When will a donee have bona fide possession of gifted property for purpose of GROB rules?

Recall - donee must have assumed bona fide possession at start of relevant period for GROB rules not to apply

A

Donee must:

  1. Obtain vested, beneficial interest in property
  2. Have actual enjoyment of the property (physical/income)
  3. Assume possession and enjoyment at the start of the relevant period

Donor transfers legal title…

  • Lives there rent-free = donee has not obtained bona fide possession (beneficial interest but not actual enjoyment)
  • Pays market rent to remain in home = donee has actual enjoyment
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10
Q

What does ‘exclusion of the donor’ mean?

A

Must be ‘as good as’ excluded from benefitting from property

Social visits/overnight stays not caught

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11
Q

What about when a gift is made into trust?

A

GROB arises if settlor (donor) is a potential B whether they actually obtain benefit or not

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12
Q

What is the effect of reserving benefit if GROB subsists at donor’s death?

I.e. still living there rent-free upon death

A

Property treated as part of donor’s estate - valued at date of donor’s death

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13
Q

What is the effect of reserving benefit if donor no longer retains benefit at date of death?

A

Treated as having made a PET on the date the reservation ceased

Will not benefit from AE

Can be charged to tax TWICE (if die within 7 years of reservation ceasing)

E.g. man transfers legal title to £650,000 house to daugher and continues to live there until 5 years before death where he moves into a care home and value of house is £700,000 - has made a GROB…

  • Man treated as having made a PET of £700,000
  • Daughter acquires house at date of GROB so has acquired at £650,000
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14
Q

What are the CGT consequences where donor makes a GROB?

A

The property becomes donee’s property; CGT may be payable by donor on increase in value of property since they acquired it (even if they have not enjoyed it because never technically had it)

So bad for both parties

I.e. if donee later sells = CGT calculated based on increase in value of property between date of gift (GROB) and date of transfer (on selling) even though they (donee) may not have obtained any real benefit from property until GROB ceased or donor died!!!
Bear in mind private residence relief (if it is the main residence passed on, will not be subject to CGT)

E.g. man transfers legal title to £650,000 house to daugher and lives there until death and daughter lives elsewhere. Valued at £750,000 at death. This is a GROB

  • House included in taxable value of his estate for IHT purposes at £750,000
  • No CGT payable by him (PRR) but daughter’s acquisition cost will be £650,000 - so has made gain of £100,000 despite never living there
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15
Q

Why is it better to receive gift upon death than GROB?

A

No CGT liability when receive gift on death due to free CGT uplife (donee treated as having received property for market value at date of death)

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16
Q

What is the POAC (pre-owned assets charge)?

A

Annual income tax charge imposed on individuals who give away certain types of property during lifetime but obtain benefit from that property

Prevents exploitation of loopholes in GROB rules

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17
Q

Can property be taxed under both GROB and POAC?

As both involve giving away property but continuing to benefit from them

A

No - POAC will not apply to property which remains within individul’s estate for IHT purposes - this is why POAC is an annual income tax charge

Can elect to be taxed as GROB instead!

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18
Q

To what 3 types of property does POAC apply?

A
  1. Land
  2. Chattels
  3. Intangible property held in a settlor-interested trust (property other than chattels e.g. cash, credits, shares)

Rules for each type different

Also a de minimis exemption and territorial exemption (POAC cannot be charged on individuals who reside/are domiciled outside the UK)

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19
Q

What are the 2 conditions for land to be subject to POAC?

A
  1. An individual occupies land (construed widely)
  2. Either disposal or contribution condition is met

I.e. 2 = individual has either disposed of occupied land or has contributed directly/indirectly to acquisition of land without obtaining beneficial interest in it

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20
Q

What is the effect if POAC applies to land?

A

The benefit an individual receives through occupation is treated as income - pays income tax on equivalent of market rent they would have to pay to occupy land

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21
Q

For chattels to be subject to POAC, are the conditions the same as land?

A

Yes except that occupation condition replaced with possession/use of property

No definition, de minimis thresholds apply

E.g. man makes gift of shares to sister - sister sells shares and uses proceeds to buy car - man uses car everyday to drive to work and parks outside of house
* Possession = satisfied; man has use of car
* Contribution = satisfied; car acquired indirectly through sale of shares
He must pay the POAC

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22
Q

What is the effect if POAC applies to chattels?

A

Income tax will be calculated by taking market value of chattel and multiplying by official rate of interest

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23
Q

What are the 2 conditions for POAC to apply to settlor-interested trusts?

A
  1. Trust must be settlor-interested (circumstances in which trust property is/will/may become payable to or to benefit of settlor)
  2. Trust property must include intangible property which was settled into trust by individual on creation/subsequently added by them to settlement
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24
Q

What is the effect on settlor-interested trusts if POAC applies?

A

Calculated by reference to official interest rate that would be payable on the settled property (with credit for any income tax/CGT paid under other anti-avoidance rules)

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25
Q

What excluded transactions does POAC not apply to?

A
  • Transfers to spouse/CP
  • Dispositions for purpose of family maintenance
  • Annual/small gift exemptions
  • Arm’s length sales (sales to unconnected persons do not meet disposal condition)
  • Occupation seven years after cash gift (if contribution condition met over 7 years before occupation/possession condition, POAC does not apply)

Broadly similar to IHT exemptions

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26
Q

What is the General Anti-Abuse Rule (GAAR)?

A

Intended to catch a wide range of aggressive tax avoidance (applies to range not just IHT)

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27
Q

What happens when arrangements are caught by GAAR?

A
  1. The taxpayer must counteract abusive effect of arrangements (just and reasonable adjustments)
  2. Penalty of 60% of counteracted amount payable
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28
Q

When does the GAAR apply?

A
  1. Arrangement exists giving rise to a tax advantage (reduction, deferral or complete avoidance)
  2. Tax advantage relates to a tax to which GAAR applies (inc IHT)
  3. Arrangement satisfies the ‘main purpose’ test (obtaining tax advantage is main purpose)
  4. Arrangement is abusive (cannot reasonably be regarded as reasonable course of action re relevant tax provisions)

Will compare arrangement to hypothetical version without arrangement

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29
Q

What is DOTAS (Disclosure of Tax Avoidance Scheme)?

A

Reporting regime to make HMRC aware of potentially unacceptable tax avoidance arrangements at an early stage (applies to range inc IHT)

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30
Q

How does DOTAS work?

A

Duties placed on promoters of arrangements to inform HMRC about notifiable arrangements or proposals

Penalties for failing to comply but non-compliance not criminal offence

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31
Q

What should promoters do?

A
  • Provide scheme refrence number (allocated by HMRC) to parties to arrangement
  • Provide info to HMRC about any clients to whom they provide services connected to notifiable arrangements
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32
Q

When are arrangements in respect of IHT notifiable?

A
  1. Arrangements fall within description prescribed by HM Treasury (hallmarks)
  2. Arrangements enable any person to obtain an advantage for a tax to which a relevant hallmark applies
  3. Arrangements are such that main benefit/one of benefits is the obtaining of identified advantage
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33
Q

What are the 2 conditions that must be satisfied for the IHT hallmark to apply?

A
  1. Main purpose/one of main purposes of arrangement is one or more specific advantages re IHT
  2. The arrangements involve one or more contrived/abnormal steps without which there would be no unfair tax advantage
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34
Q

What are the specific advantages?

A
  • Avoidance/reduction of charges arising under GROB rules (unless it gives rise to POAC instead)
  • Reduction in value of individual’s estate which does not give rise to a chargeable transfer or PET

Examples:
* Creation of a reversionary lease to lessor’s children that starts so far in future that lessor would not still be expected to be alive
* Creation of employee benefit trust to benefit settlor’s children
* Settlement of shares qualifying for BPR with an arrangement to sell them back to settlor

35
Q

What will not be notifiable?

A
  • Ordinary outright gifts (even where exempt)
  • Executing a will which gives rise to an IHT exemption
  • Acquisition of property which qualifies for a statutory relief

I.e. ordinary IHT planning

36
Q

What are the goals of tax planning?

A
  1. Minimise IHT (reduce size of taxable estate in advance)
  2. Retain sufficient assets to maintain financial security during own lifetime
  3. Provide adequately for family after death
37
Q

How should the annual exemption be used in tax planning?

A
  • Use AE each year to make gifts (consistent giving over several years)
  • Use after any other available exemption/relief applied
38
Q

When is the normal expenditure out of income useful?

A

For clients who have a large income where significant amount is unused each month

Not for ‘asset rich cash poor’ elderly clients

Can make monthly premiums on life policy into trust and will not treated as PETs (because no upper limit)

39
Q

How should the spouse exemption be used in tax planning?

A

Richer spouse should transfer to poorer spouse - can make more exempt transfers than if one party held all assets

Can also be used for CGT - gains not accrued until donee disposes

40
Q

How can the charity exemption be used in tax planning?

A

If a person leaves 10% or more of net estate to charity, will be taxed at reduced rate of 36%

Net estate = succession estate assets + additional items (inc pass by sship)

41
Q

How should BPR and APR be used in tax planning?

A

Clients could choose to invest in assets that qualify for BPR/APR; turning non-exempt cash into exempt assets

More efficient to give away to non-exempt B

42
Q

How can assets not subject to IHT be used in tax planning?

A
  • Take out life insurance and/or pay into a pension and write benefit of these in trust
  • Should take steps to ensure death benefits have been nominated for a third party (if not already)

Recall - discretionary lump sum payments/life policies written in trust are excluded from taxable estate

43
Q

What happens when a life policy is written in trust after it has been set up?

A

There is a deemed PET of redemption value of policy at that date

Usually small amount

44
Q

How can transfers of value be used in tax planning?

A

Giving away valuable asset/large cash lump sum = smaller estate after transfer and less IHT due

45
Q

How can the risk of not surviving 7 years after making PET be mitigated?

A

Taking out fixed term life assurance specifically to cover cost of IHT

Could be written in trust to ensure lump sum paid out not taxed

46
Q

What should be considered when making PETs for tax planning?

A
  • Give away assets that increase in value over time (chargeable value of PET will be value at time it was made not date of death)
  • Make gift of assets over 2 separate tax years to use 2 CGT annual exemptions (or just transfer cash as exempt from CGT)
47
Q

What is the parental settlement rule?

A

Where the income arising from property transferred to unmarried minor child is taxed as if it still belongs to parent

48
Q

How can LCTs be used in tax planning?

A
  • If LCT for amount equal/less than NRB there is no IHT due at that time and if survives 7 years then no IHT due at all
  • Can make LCTs of up to NRB every 7 years (effectively ‘resets’)
49
Q

When will spouse and charity exemption offer a tax saving?

A

If IHT would otherwise have been payable

50
Q

Can a testator increase the amount of a charitable gift without reducing the amount the non-exempt B receives after tax paid?

A

Yes - increase in legacy amount is offset by tax saving made by the lower rate (36%)

Cost of legacy born by HMRC not estate Bs

51
Q

What should a client be reminded of when BPR/APR is available?

A
  • Must own qualifying assets at date of death (not will)
  • Should not make changes that would mean assets become outside of qualifying criteria
  • Should not sell assets before death
52
Q

Who should the client not make specific gifts of qualifying assets to?

A

Exempt Bs - both exemptions will apply re same gift and BPR/APR is wasted

53
Q

Where a testator wants their spouse to benefit from BPR/APR, what can they do?

A

Make specific gift of qualifying assets to a discretionary trust (non-exempt B) and claim BPR/APR

  • If spouse named as one of trust Bs they can benefit from asset despite not inheriting directly
  • Will also remain outside of survivor’s taxable estate
54
Q

What happens when qualifying assets are not specifically given away and fall ito the residuary estate?

A

APR/BPR do not attach to the assets, instead the benefit of relief is apportioned generally between taxable and non-taxable Bs

So wasted where apportionment allocates some/all relief to exempt B e.g. residuary passes to exempt B

55
Q

How do statutory rules apply to ensure an exempt B is not taxed on their gift?

A

IHT will be taxed from elsewhere subject to ‘subject to/free of tax’

E.g. Specific gift to chargeable beneficiary (£100,000 to daughter subject to tax) and residue to chargeable and exempt beneficiaries (residue equally between spouse and son):

  • Spouse’s share of residue is exempt.
  • IHT due is apportioned between the legacy and son’s half of residue.
  • Daughter gets legacy with IHT deducted (i.e. less than £100k)
  • Son gets share of residue with tax deducted (i.e. less than spouse)
56
Q

What happens where a specific gift (over NRB) is to a chargeable B (free of tax) with residue to exempt B?

A

Reduced balance passes to exempt B; IHT was due and residue was only part of estate from which it could be taken

57
Q

How will ‘subject to tax’ and ‘free from tax’ affect how IHT is paid?

A
  • £400,000 to son subject to tax, residue to spouse = only part of estate subject to IHT is specific gift; IHT paid from legacy and spouse inherits residue with no deduction for IHT
  • £350,000 to son free of tax, residue to spouse = £350,000 paid to son and IHT paid from residue
58
Q

When is double grossing up required?

A

Where:
* specific gifts to chargeabkle Bs and a gift of part of residue to an exempt B
* specific gifts to chargeable B where some but not all are ‘free of tax’

59
Q

When is ‘fixing NRB’ relevant?

A

Where a client does not want to use their NRB, because if it goes up in the future the combined value of the two NRBs can be larger than if the first was used

E.g.
First spouse dies NRB is £325,000, when second spouse dies it has increased to £400,000

Will 1 gives away £NRB to chidlren = first spouse dies uses £325,000 NRB, second spouse dies uses £400,000 NRB = £725,000 total NRB

Will 2 gives everything to spouse = first spouse did not use NRB, second spouse can use both NRBs = £800,000 total NRB

60
Q

What is bunching?

A

When the surviving partner (of unmarried couple) ends up with own assets plus inherited (which were already taxed because no spouse exemption); value of inherited assets can be re-taxed before passing to children

61
Q

How can a couple limit the amount survivor inherits (and avoid surviving spouse’s estate becoming too large)?

A
  1. Make gifts to children/other family members on first death rather than leaving everything to each other
  2. Leave amount to discretionary trust instead of survivor directly
62
Q

How would this discretionary trust work? What is the benefit when the survivor (B of DT) dies?

A
  • Survivor and children/grandchildren named as Bs they can benefit from assets (but not have complete control over them)
  • When survivor dies = taxable estate does not include assets held in trust

Tax saving can outweigh the administrative costs and the downside that Bs do not have unrestricted/certain access to the trust

63
Q

What should be done in scenario where one party has an estate worth less than the NRB, and poorer of unmarried couple dies first meaning NRB cannot be used in full and unused part is wasted?

A

The richer of the two should make transfers during lifetime to equalise the value of the two estates and then each person making wills that benefits the other

64
Q

What should a party consider when they want to use their RNRB?

A
  1. If specific gift of property being made to Bs or property is part of general residue of estate
  2. If property is passing directly to descendants
    If shared between non-lineal descendants, B is under age, or property left in certain types of trust = more complicated and RNRB may not apply
65
Q

Why should a client who wants to give away the NRB to a non-exempt B not draft the gift of a fixed sum (i.e. give the sum of £325,000 to…)?

A
  1. May not have a full NRB available when they die (so part of gift may become taxable)
  2. Amount of NRB can change over time (so missed opportunity)

Should be: “I give as much of my nil rate band as is available to my daughter” + certainty re TNRB or TRNRB

66
Q

As trust does not have separate legal personality, what does a gift into trust take effect as?

A

A transfer to the Ts (legal owners of the asset) - so normal IHT applies

Bs have equitable and beneficial interests

67
Q

What is a will trust?

A

A trust created on death by testator’s will
* Will is trust deed
* Testator is settlor

68
Q

When does a will trust come into existence?

A

On the date of testator’s death when provisions of the will become operative

Not when executed

69
Q

What is a discretionary will trust?

A

A trust for the benefit of a group of Bs, none of whom have a fixed right to trust assets

Ts have absolute discretion over capital and income

Will be drafted as discretionary trust of residue (whole or part of residuary estate passes) or legacy to a discretionary trust (fixed sum equal to NRB passes)

70
Q

What is a life interest will trust?

A

A trust for the benefit of a life tenant (entitled to income during lifetime) and the remainderman (entitled to capital when life interest ends; usually on death)

Ts do not have complete discretion over distributions

71
Q

If settlor creates a discretionary will trust, is there an immediate tax saving for the testator/estate?

A

No

No difference in this sense cf discretionary trust v outright gift in will

72
Q

Can spouse exemption apply to discretionary will trusts?

A

No - even if named as one of the trust Bs

73
Q

As there is no immediate tax saving, why is the use of a discretionary trust considered ‘tax planning’?

A

If testator makes gift to DT, the Bs can benefit from trust assets without accumulation of wealth into any of them individually - so when B dies their taxable estate does not include the trust assets at the time

74
Q

Can the residence NRB apply if deceased’s residential interest passes to a DT?

A

No! Children are not inheriting directly

75
Q

What are the non-tax purposes for setting up a DT instead of leaving gifts to individuals?

A
  • Not required to know in advance how estate should be distributed
  • Changing needs of B can be accomodated
  • Letter of wishes can still be used to exercise some discretion (but not binding)
  • Assets are protected from claims by B’s creditors or spouse
76
Q

Are there IHT charges to the discretionary will trust?

A

Not for the estate of any individual B, but HMRC apply charges to the trust paid by trust fund

Significantly smaller than IHT that would be payable if owned outright

77
Q

What is the purpose/effect of a 2 year discretionary will trust?

Drafted with intention they only last for period of 2 years from testator’s death

A

Distributions of capital from a DT made by Ts within first 2 years of testator’s death are deemed to have taken place under deceased’s will for IHT purposes and not by the Ts (so relevant exemptions/relief can apply) - see example

Ts can decide who among Bs should inherit and what they should receive

Only used where trustee is trusted to make appropriate decisions i.e. will often be surviving spouse as one of trustees

78
Q

Example of 2 year DT

A

Shows how exemptions/reliefs can apply

79
Q

Can spouse exemption be claimed on amount passing to a life interest trust?

A

Provided testator’s spouse if life tenant

No relief if remainder B

80
Q

Is the IHT position the same whether a testator leaves entire estate to spouse absolutely or leaves entire estate to life interest trust and names spouse as life tenant?

A

Yes! But in life interest can benefit from practical advantages of trust while maintaining benefit of IHT exemptions

81
Q

What are the key practical advatages of life interest trust compared to outright gift?

A

Testator can
1. Control the ultimate destination of their estate
2. Specify who benefits as the life tenant while preserving capital of their estate for other Bs

Can address concerns where settlor has children from previous marriage or thinks spouse will remarry: obtains tax advantage of spouse exemption but also ability to preserve assets for other family members after spouse dies

82
Q

Is the life tenant entitled to trust capital and income?

A

Only income

May not be sufficient

83
Q

What if life tenant’s needs are likely to exceed resources plus trust income?

A

Either make trust fund larger so more income generated or ensure Ts have power to advance capital/make loans to life tenant if needed

Wills & Administration of Estates (13 decks)

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