Tax (probate)

Question 1

Inheritance tax - rates and bands

Answer 1

Nil rate band = £0 - £325k

Also number of tax reliefs available

Exceeds nil rate band => taxed at 40%

Question 2

Inheritance tax - role of location

Answer 2

In UK => liable to IHT on transfers of all worldwide assets

Outside UK => liable to IHT on transfers of UK assets only

Question 3

Lifetime transfers - general rule

Answer 3

Generally not chargeable

BUT: Some chargeable either automatically (a chargeable transfer) or potentially (potentially exempt transfer – PET)

Whether PETs are exempt depends on whether donor dies within 7 years of making the gift

Question 4

Lifetime transfers - exempt transfers/gifts

Answer 4

1. Gifts to spouses
   - exempt whether in lifetime or on death
   - exception for when donor is UK domiciled and spouse is not (=> first £325k exempt from IHT)
2. Gifts to UK charities (and EEA)
3. Small gifts
   - Lifetime gifts up to £250 to any donee in a tax year
   - All or nothing => if £300 gift made all £300 is treated as a transfer of value
   - No limit to no of donnees
4. Gifts of marriages
   - Up to certain limits, which depend on the relationship between the donor and donee:
   a) Parent => up to £5k
   b) Grandparent => up to £2.5k
   c) Bride – groom (etc and before wedding) => £2.5k
   d) All others - £1k
5. Normal expenditure out of income
   - ie:
   1) habitual or regular
   2) if donor is left with sufficient income to maintain their normal standard of living
6. Annual exemption
   - £3k avaialble in each year
   - can be carried forward one year

Question 5

Lifetime transfers - PETs

Answer 5

= gift by one ind to another that is not covered by any exemption

Treated as exempt whilst donor is alive and will not give rise to lifetime IHT charge

Donor dies within 7 years of making gift => PET will become chargeable transfer and any tax due will be payable by the recipient of the gift

Question 6

Lifetime transfers - CLTs (chargeable lifetime transfers)

Answer 6

= gifts to trusts or companies

Tax owed only if gift exceeds the il rate band (£325k) after deducting any available annual exemption

Tax on CLTs:
- Tax owed => paid either by donor or by Ts
- Ts pay the IHT (out of the funds gifted to the trust) => lifetime rate is 20%
- Donor pays IHT => rate is 25%

Other CLTs made during the prev 7 years (ie ‘cumulation period’) =>
- Add gifts to all others made and tax owed if sum exceeds nil rate band
- Only CLTs count (PETs ignored)

Question 7

Procedure for calculating lifetime tax

Answer 7

1. Identify the ‘value transferred’ using the ‘loss to donor’ principle
2. Deduct annual exemption(s) to arrive at CLT
3. Identify inl rate band for year of transfer
4. Deduct other chargeable transfers made within the 7 years before the gift to arrive at nil rate band remaining; and
5. Pay the excess lifetime transfer over the nil rate band at 20% or 25%

Question 8

Lifetime tax (additional taxes on death) - PETs

Answer 8

Use nil rate band and IHT rates in force at date of death

Work out amount of nil rate band remaining => deduct any gross chargeable transfers made in 7 years before PET (NOT 7 years from death)

Tax charged at 40%

BUT consider taper relief
- If more than 3 years between date of PET and donor’s date of death
- Reduces % amount of tax payable (not amount of the transfer)
- 0-3 years => nil
- 3-4 years => 20%
- 4-5 years => 40%
- 5-6 years => 60%
- 6-7 years => 80%

Question 9

Lifetime tax (additional taxes on death) - additional CLT tax

Answer 9

Ie taxed both as lifetime transfers and on death (if within 7 years of transfer)

Calculated in same way as PETs (taper relief also available)

BUT credit for lifetime tax paid (whoever paid it)
- difference is additional tax payable (if lifetime tax exceeds death tax, not repayable)

Question 10

Tax reliefs for lifetime transfers (general)

Answer 10

1. Business relief
2. Agricultural relief

Note:
- Have immediate effect only for gifts into trusts (CLTs) as PETs are not immediately chargeable
- Reliefs then taken into account in calculating IHT due
- Both automatic if conditions met (ie no requirement to make a formal claim)

Farmer runs a farming business => eligible for both business relief and agricultural relief
- Agricultural relief given in priority (to property above only)
- Business relief may then be available on any excess value in respect of assets used in business (eg plant/machinery)

Question 11

Tax reliefs for lifetime transfers - business relief

Answer 11

= Reduces the value of the business property given as a lifetime gift to a trust or at death

Applied before any annual exemption

Relevant business property:
- Entitled to 100% relief if:
a) A sole trade business or partnership interest to a trust
b) Shares in an unlisted trading company
- Entitled to 50% relief if:
a) Shares in a quoted trading company if the donor has voting control of the company (ie more than 50% of the ordinary shares);
b) Land or buildings or plant and machinery owned by an ind and used either by a partnership of which they are a member or a company they control

Business MUST be trading (Ie selling goods/services as opposed to merely investing in things)

Ownership
- General rule = donor must have owned the property for at least 2 years before the transfer
- Exceptions incl:
a) Replacing one business property asset with another within a 3-year period
b) Inheriting business property assets from spouse

Question 12

Tax reliefs for lifetime transfers - agricultural relief

Answer 12

ie When a donor transfers agricultural property to a trust during life or at death

(also before any annual exemption)

Relief = 100%

Agricultural property = Agricultural land or building used for the purposes of agriculture and situated in UK, channel islands, isle of man or EEA

Available:
- To a farmer/donor who has owned the agricultural land or buildings transferred for at least 2 years if the owner was using the land in their business; or
- To a landowner who leased out the agricultural land or buildings transferred to the trust IF the assets are being used for agricultural purposes for the tenants AND were owned by the donor for at least 7 years

Activities excluded incl:
- Grazing horses (except in connection with a stud farm)
- Land used for fishing, shooting and other sporting rights

Question 13

Tax on death estate - how is date of death treated

Answer 13

Treated as having made a chargeable transfer (ie taxable gift) equal to the net value of their assets at the date of their death

Net value = total value of all the assets owned by D at death less funeral expenses and any debts owed by D at date of death

Tax on death estate is paid by PRs

Question 14

Calculating tax on death

Answer 14

Similar to process for death tax on lifetime transfers BUT annual exemption is not available

Process =
1. Start with nil rate band for year of death
2. Nil rate band reduced by any chargeable transfers (ie PETs and CLTs) made in 7 years prior to death
3. Apply NRB to gifts made in 7 years prior to death
4. If any NRB remaining => deduct it from death estate to determine amount of death estate that is chargeable to IHT (tax charged at death rate of 40%)

Often PETs and CLTs in 7 years prior have used up all nil rate band => whole estate charged at 40% tax

Question 15

Death estate - exempt gifts

Answer 15

1. To spouse/CP
   - But limited to £325k if D was UK domiciled and spouse is not
2. Gifts to a charity (UK/EEA)
   - 10%+ of net estate left to charity => rest of taxable estate charged at 36% instead of 40%
   - Must be at least 10% of the baseline amount (ie value of estate charged to IHT after deducting all available reliefs, exemptions, and available NRB, but excl exemption for charitable legacy itself)
   - Residence NRB ignored when calculating baseline amount

Question 16

Death estate - valuation of assets

Answer 16

Value of asset at date of death = open market value

But some specific valuation rules:

1. Quoted shares => looks at official list published by stock exchange at date of death
2. Jointly owned assets
   - Spouse => consider ‘related property’ rule (ie higher amount applies)
   - Not spouse/civil partner => value partially discounted because of difficulty in selling such an asset

Question 17

Death estate - transferrable nil rate band

Answer 17

Ind dies leaving some or all of their NRB unused => claim can be made for the unused proportion to be transferred to their spouse

Spouse then has uplifted NRB to use against IHT liabilities arising on their death (up to additional 100%)

Uplifted NRB CANNOT be used against lifetime tax on CLTs

Calculated as a % of the unused portion (relevant where NRB rates change)

Can transfer from up to 2 spouses
- But limited to an additional 100% (ie max = 2 x NRB on death)

Question 18

Death estate - residential nil rate band

Answer 18

Available if estate incl a home that was used as D’s residence at some point IF the residence/proceeds of residence are left to lineal descendants or spouses of such descendants

NO requirements for descendents to occupt after death

=> value of dwelling at time of death (after deducting liabilities eg mortgage, but before reliefs and exemptions) up to residential nil rate band (currently £175k)

Tapering applies to estates over £2m (£1 for every £2 over that limit) => in effect RNRB eliminated for estates over £2.35m

Transferrable RNRB (works same way as transferrable NRB)

NOTE downsizing:
- Estate entitled to RNRB if deceased downsized to a less valuable home or sold or gave away their home during their life
=> full benefit of RNRB not lost and instead estate can claim a ‘downsizing addition’ which uplifts the amount of the RNRB in the death estate (100% of RNRB)

Question 19

Death estate - quick succession relief

Answer 19

ie When an ind’s estate had been increased by a gift made to them in the 5 years before death upon which IHT was paid

Amount of relief = complex formula (but amount decreases by 20% for each year between donor’s death and recipient’s death)

NO requirement for gifted property to still be owned by D at date of death

Question 20

Post-mortem reliefs

Answer 20

1. Quoted shares/units in authorised unit trusts/shares in open-ended investment companies at a loss
   - PRs must take account of all sales of the above in the 12 months of the date of death
   - Profits and losses are aggregated
   - As IHT would have already been paid on the value of the assets at the date of death, a postmortem claim will usually generate a repayment of IHT
2. Land and buildings
   - Relief available for any sales of land and buildings within 3 years of the date of death
   - Calculate overall loss by aggregating all profits and losses in the 3-year period, and any resulting loss is deducted from the value of the estate for IHT purposes
3. Woodlands relief
   - If land not eligible for agricultural or business relief, but incl land on which trees and underwood are growing => woodlands relief may be available
   - D must have been beneficially entitled to the land for 5 years prior to death (or had inherited the land on the death of another)
   - Relief operates by excluding value of woodlands from the estate
   - Any liability to IHT is deferred until the woodlands are disposed of

Question 21

Anti-avoidance rules

Answer 21

1. Gifts with reservation of benefit
   - ie prevents a donor form giving away an asset but continuing to derive some benefit from the asset
   - Reserved benefit => treated as still forming part of donor’s estate on death
   - Eg where property given away but donor still resides there
   - Rules do not apply if donor pays market rent for continued occupation
   - Rule may be avoided by releasing property before death (treated as PET)
2. Pre-owned asset tax
   - Imposes an income tax charge on benefits received by the former owner of the property if:
   a) Former owner benefits directly or indirectly from an asset they previously owned; and
   b) Transfer is not within the gifts with reservation of benefit rules

Question 22

Payment of IHT - when due and who pays

Answer 22

Typically due 6 months from the end of the month in which the decedent died

CLT:
- Due – later of 6 months from end of the month in which CLT was made and 30 April after tax year in which it was made
- Payable by the trustee (20%) or the donor (25%)
- Any additional tax on death arising from a CLT is due 6 months after the end of the month in which death occurred (payable by the trustee)

Usually PRs liable for IHT on property transferred on death
- Will silent => PRs pay out of residuary estate
- Property given with reservation of benefit => donee of gift is liable to pay IHT (but PRs become liable if not paid within 12 months)
- Property passes other than by will or intestacy (eg an interest passing from one JT to another), liability will fall on PRs but will be borne by the beneficiary

Question 23

Income tax and CGT during admin of estate - general

Answer 23

D’s income tax/CGT:
- PRs to complete tax return covering income tax in period 6 April to death
- Settle tax owed (must be finalised in order to calculate IHT)
- CGT also incl on tax return

Estate generates income/capital gains => PRs submit tax returns detailing any income and gains accruing to them during the period of administration
- Admin period often straddle more than 1 tax year (in which case returns required for each tax year)
- PRs bound by normal self-assessment rules (ie returns must be filed by 31 Jan)
- BUT instead of making annual self-assessment returns, PRs may make an informal payment of the total liability for the whole period of admin together with a single income tax and capital gains tax computation

Question 24

PRs liabilty for income tax

Answer 24

Non-savings income and interest charged at basic rate (20%)

Dividends charged at dividend ordinary rate (7.5%)

Personal, personal savings, and dividend allowances are NOT available

PRs took out loan to pay IHT => interest on loan is a deductible payment against income

Question 25

PRs liabilty for CGT

Answer 25

PRs are deemed to acquire the assets of D at the date of death (at a base cost equal to their market value at death ie probate value)

Disposals
- PRs liable to CGT on any gains made by them on disposals during admin period
- Normal CGT rules apply to calculate the gain
- PRs receive annual exempt amount for the year of death and the next two tax years
- Exempt amount is same as that for inds (£3k ish)
- Capital losses set against gains in the same year, and any excess losses are carried forward

CGT rates for PRs =
- 20% on general gains
- 28% for residential property

Question 26

B’s liability for CGT

Answer 26

Distribution to Bs (under will)
- NOT treated as a disposal for CGT purposes
- B deemed to have acquired the asset at the date of death for its probate value (ie market value at date of death)

Disposal of assets by B
- May have resulting CGT liability – will require comparing the disposal proceeds with their acquisition cost (ie probate value)