tax planning/avoidance & anti-avoidance rules Flashcards
What is tax avoidance?
The efficient and lawful arrangement of a client’s affairs in a manner which minimises their liability to tax.
What is aggressive tax avoidance?
A form of tax avoidance which often involves the taxpayer entering into complex or artificial arrangements which have the overall effect of reducing their tax liability.
What is tax evasion?
Where a taxpayer withholds information about assets or income, or otherwise takes steps to avoid paying the tax they are liable for.
To use annual exemptions effectively in order to avoid tax liability, what should clients be advised to do?
Use the AE each year to make gifts without IHT consequences, even if the client cannot give away a large amount in one go.
The AE should be used after any other available exemption or relief is applied to ensure the AE is available for later transfers.
To use family maintenance effectively if the donee is elderly, what should clients be advised to do?
If the donee is elderly and already has assets that exceed the NRB, it would be inappropriate (from an IHT perspective) to increase their estate further. Instead of claiming the relief, it may be preferable to put in place a loan arrangement, so sums received from the younger relative do not fall within the elderly relative’s estate when they die.
What is normal expenditure out of income exemption?
Regular payments of spare income which do not affect the donor’s standard of living are exempt.
There is no upper limit to this exemption.
Which assets are not subject to IHT?
Discretionary pension lump sum payments and life insurance policies written in trust are excluded from the taxable estate.
How can a client mitigate against the risk of dying within 7 years after taking out a PET?
The client can mitigate against the risk of dying within 7 years by taking out fixed term life assurance specifically to cover the cost of any IHT on the PET.
If IHT is charged following death for a failed PET, what value of the PET will be used to calculate tax?
It will be on the chargeable value of the PET at the time it was made.
What advice should be given to clients as part of effective tax reduction regarding failed PETs?
Clients should consider giving away assets which are likely to increase in value over time.
If an individual wants to make a gift of shares or other assets attracting CGT, what should they do?
Consider making two separate PETs in different tax years. This will allow the transferor to use two CGT annual exemptions.
If the transfer is to an unmarried minor child, how is the income taxed for income tax purposes?
As if it still belongs to the parent.
Is the benefit of spouse exemption lost if the client is no longer married at that date?
Yes.
When must a client own qualifying asset so that the business property relief will apply?
A client must own qualifying assets at the date of their death (not the date of their will) for the relief to apply.
What is the most tax effective way to ensure that BPR is not wasted when a gift qualifies for BPR?
A possible solution is for the testator to make a specific gift of the qualifying assets to a discretionary trust (a non-exempt beneficiary) and claim BPR or APR. The testator can then leave other assets to their spouse.
Provided the testator’s spouse is named as one of the discretionary trust beneficiaries they will be able to benefit from these assets despite not inheriting them directly.
If qualifying assets are not specifically given away, and therefore fall into the residuary estate, does APR/BPR attach to the assets?
No - Instead, the benefit of the relief is apportioned generally between exempt and non-exempt beneficiaries.
When all gifts to exempt beneficiaries are made free of IHT, how is this done?
Yes - This means the beneficiary should receive their inheritance without the cost of any IHT being directly applied to their gift.
Where is IHT taken from when gifts are made to exempt beneficiary with residue to chargeable beneficiary?
IHT is taken from the residue.
Where is IHT taken from when specific gifts are made to exempt beneficiary with residue to chargeable and exempt beneficiary?
Only part of the residue is subject to IHT.
Where is IHT taken from when specific gifts are made to chargeable beneficiary (subject to tax) and residue to exempt beneficiary?
The only part of the estate subject to IHT is the specific gift.
Where is IHT taken from when specific gifts are made to chargeable beneficiary (free of tax) with residue to exempt beneficiary?
The specific gift is not charged with IHT since it is made ‘free of tax.’ The IHT will unfortunately have to come from the residue from the exempt beneficiary.
Due to the possibility of NRB increasing, what will be sufficient tax planning advice be to a testator who has two options?
The advice will be to leave everything to the spouse (Will 2). This is because if the NRB increases from £325,000 to £400,000 then the Spouse’s estate is entitled to a full NRB for both the spouse’s own NRB and the Testator’s unused NRB.
The total NRB for their combined estates is £800,000.
If Will 1 is followed, what is the outcome?
T’s estate is entitled to a NRB of £325,000 (applied against the gift to the children). S’s estate is entitled to a NRB of £400,000. Total NRB for their combined estates is £725,000.
