Tax Planning in Wills: Allocation of Exemptions Flashcards
Which of the following beneficiaries is exempt from IHT?
A. Spouse
B. Adult child
C. Cousin
D. Grandparent
A. Spouse
Explanation:
Gifts to a spouse or civil partner are fully exempt from inheritance tax.
When a gift is made “subject to tax” who bears the IHT?
A. The residue beneficiary
B. The recipient of the gift
C. HMRC directly
D. The executor
B. The recipient of the gift
Explanation:
If a gift is “subject to tax”, the gift is reduced to pay the inheritance tax due.
What happens if a testator leaves 10% of their net estate to charity?
A. No IHT is due
B. IHT is charged at 20%
C. IHT is reduced to 36%
D. Charity must pay the IHT
C. IHT is reduced to 36%
Explanation:
Leaving 10% of the net estate to charity reduces the IHT rate from 40% to 36%.
A testator leaves £100,000 to a charity and residue to a friend. What happens to the residue?
A. It is tax free
B. It is paid directly to the charity
C. It is divided equally
D. It is subject to IHT
D. It is subject to IHT
Explanation:
The charitable gift is exempt but the residue to the friend is taxable.
A will leaves £400,000 to a spouse and residue to adult children. How is the spouse’s gift treated?
A. Fully exempt
B. Partially taxable
C. Subject to grossing up
D. Paid with deduction for tax
A. Fully exempt
Explanation:
A gift to a spouse is fully exempt from inheritance tax regardless of the amount.
If a gift to a non-exempt beneficiary is “free of tax,” who ultimately bears the cost of the IHT?
A. The donee
B. The residuary estate
C. HMRC
D. The trustees
B. The residuary estate
Explanation:
If a gift is “free of tax,” the tax is paid from the residue of the estate.
When is grossing-up necessary?
A. When a gift is subject to tax
B. When residue is exempt
C. When a gift is free of tax
D. When no tax is due
C. When a gift is free of tax
Explanation:
Grossing-up calculates the correct tax where the testator wants the donee to receive the full gift value free of tax.
What happens if a testator leaves qualifying business assets to a spouse?
A. BPR is enhanced
B. There is a double exemption
C. There is a reduced tax rate
D. BPR is wasted
D. BPR is wasted
Explanation:
Giving qualifying assets to a spouse wastes BPR since the spouse’s exemption already prevents any tax charge.
When calculating IHT, what is deducted first?
A. Funeral expenses
B. Lifetime gifts
C. Residuary gifts
D. Charitable donations
A. Funeral expenses
Explanation:
Funeral expenses and debts are deducted first before calculating IHT.
If a legacy is made “subject to tax” what does the beneficiary receive?
A. Grossed-up amount
B. Gift minus tax
C. Gift plus tax
D. Net estate
B. Gift minus tax
Explanation:
When a legacy is “subject to tax,” the inheritance tax due reduces the amount the beneficiary receives.
If residue passes to a charity and a specific gift to a child is made “subject to tax”, who pays the tax?
A. Charity
B. Executor
C. Child
D. Residuary beneficiaries
C. Child
Explanation:
When a legacy is “subject to tax,” the tax is deducted from the child’s gift, not from the charity.
Which estate structure causes “double grossing-up”?
A. Gifts only to charities
B. No gifts at all
C. Specific taxable gifts plus exempt residue
D. All gifts to spouses
D. Specific taxable gifts plus exempt residue
Explanation:
Double grossing-up is required when taxable gifts are free of tax and residue passes to exempt beneficiaries.
In a will, residue is split equally between a spouse and a charity. What happens with exemptions?
A. The charity’s share is taxed but spouse’s is not
B. The spouse’s share is taxed but the charity’s is not
C. Both shares are taxed equally
D. Both shares are exempt
D. Both shares are exempt
Explanation:
Both spouse and charity beneficiaries are fully exempt from IHT. No tax is charged on either share.
A client plans to leave agricultural land specifically to their spouse. What is the main tax planning risk?
A. Double IHT charge on the land
B. Wasting APR relief
C. Spouse exemption lost if spouse moves abroad
D. Child beneficiaries paying the APR
B. Wasting APR relief
Explanation:
Leaving agricultural property to a spouse wastes Agricultural Property Relief (APR) because the spouse’s exemption already removes the IHT charge.
A testator leaves £500,000 in residue split between a child and a spouse, without specifying tax burden. How is tax apportioned?
A. All paid from child’s share
B. All paid from spouse’s share
C. Paid only from residue passing to the child
D. Shared equally between child and spouse
C. Paid only from residue passing to the child
Explanation:
Tax is apportioned to the chargeable beneficiary (the child). The spouse’s share is exempt.
