Taxation Inheritance Tax Flashcards
To whom does IHT apply to?
- Individuals domiciled in the UK. (applies to all their assets whether or not they are situated in UK.)
-If domiciled abroad, Only UK assets are subject to IHT
- During a transfer of an asset, when is IHT payable?
IHT is payable on that part of the value of an estate which exceeds the nil‑rate band (NRB) when assets are transferred
Here are two IHT rates, describe when you would use these rates and how you could reduce the rates to 36%.
1) Portion of value Rate
£0–£325,000 Nil
Over £325,000 40%
2) Portion of value Rate
£0–£325,000 Nil
Over £325,000 20%
1) The first value rate is payable on estate transfers made on or within seven years.
- Can be reduced to 36% if 10% or more of the net estate is left to charity.
2) The second value rate is payable on lifetime transfers for most trusts e.g. discretionary trusts.
Explain what RNRB is and the benefits of it.
RNRB (Residence Nil-Rate Band)
-This is an additional tax-free allowance for people who leave their homes to their children or grandchildren when they die.
-The RNRB can be up to £175,000
Benefits:
- RNRB can be transferred to spouse after death
- Downsizing can have tax benefits
- RNRB is available for estate under £2m
Three years prior to his death, Malcolm made a potential exempt transfer (PET) of £39,000. He had always used his annual IHT exemptions. In his will, he left his three children £12,000 each and the remainder of his assets went to his wife, Jean.
The NRB in the year Malcolm died was £150,000.
The PET of £39,000 became chargeable on Malcolm’s death, but was within his NRB.
If Jean were to die today, assuming a NRB of £325,000, how much would her executors claim?
The unused NRB is calculated as:
£150,000 – £39,000 – (£12,000 x 3) = £75,000
The unused part of the NRB as a percentage is calculated as:
£75,000/£150,000 x 100 = 50%
Malcolm’s unused percentage and the amount set against Jean’s estate would be calculated as:
(£325,000 x 50%) + £325,000 = £487,500
Henry’s wife, Rebecca, died prior to 6 April 2017. Her estate was worth £1m and she bequeathed it all to Henry. Henry died in the current tax year. His estate was worth £2.4m on his death and his daughter inherited his house.
What is the total of the nil‑rate bands available to reduce the IHT due on Henry’s estate, assuming an NRB of £325,000 and a RNRB of £175,000 in the current tax year?
Since Rebecca passed her entire estate to Henry, she has not used any of her NRB
Henry’s estate was worth £400,000 over the £2m threshold, the total available RNRB is reduced by £200,000
Calculation of available nil‑rate bands:
Henry’s NRB: £325,000
Rebecca’s transferred NRB (100%) £325,000
Total NRB £650,000
Henry’s RNRB: £175,000
Rebecca’s transferred RNRB (100%) = £175,000
Total RNRB = £350,000
Reduced by the taper (£400,000 ÷ £2) = (£200,000)
Reduced RNRB = £150,000
Total nil‑rate bands £650,000 + £150,000 = £800,000
What are the 4 categories that individuals can transfer parts of their estate prior to passing away?
Exempt transfers
Potentially exempt transfers (PET)
Gifts with reservation
Chargeable lifetime transfers
List some exempt transfers
- Transfers between spouses or civil partners;
- small gifts; £250
- annual exemptions; £3000
- donations to charity, political parties or for the nation;
- wedding and civil ceremony gifts;
- gifts that are made on a regular basis out of income;
- family maintenance; and
- death in active service/emergency circumstances
How much is the annual exemption limit and what can you do if you don’t use it all in one tax year.
Transfers each tax year up to the annual exemption limit of £3,000 are exempt.
If the exemption is not used up in one tax year, it can be carried forward to the following tax year but no further.
What are some examples of Gift with reservation?
giving away a house, but continuing to live in it; or
gifting money, but continuing to take interest from it.
Dominic made a gift of his house to his son, but he continued to live in it without paying rent. The value of the house was £174,000 when he made the gift, but when he died the house was worth £225,000.
How would IHT be treated and what could he do to be more efficient.
Dominic is treated as making a gift of £225,000 when he died rather than £174,000 when he passed legal ownership of the house to his son.
If Dominic were to have made a gift without reservation he would be treated as making a PET of £174,000. Thus, the estate would have saved IHT on the growth in value (£51,000) or up to the whole value of £225,000 if more than seven years had passed from when the gift was given.
Eleven years before he died, Peter made a CLT of £175,000. Five and a half years before he died, he made a PET of £325,000. On his death, a review was triggered to assess any transfers in the last seven years. As the gift of the PET was in the previous seven years, the PET has failed and therefore promotes a further seven‑year review encapsulating the CLT.
Calculate the inheritance tax liability.
CLT £175,000
Less annual exemption (x 2) (£6,000) (unused can be carried forward only one year)
Net gift £169,000
PET £325,000
Less annual exemption (x 2) (£6,000)
Net transfer £319,000
Less remaining NRB (£156,000)
Chargeable transfer £163,000
Full tax (@ 40%) £65,200
Reduced by taper relief (40%) £26,080
As the PET took place between five and six years from death, taper relief means only 40% of the IHT is payable. This is payable by the donee. The remaining estate is therefore liable to IHT at 40% on the full value.
What is quick succession relief?
If an estate is inherited then the person who inherited the estate dies within 5 years, this relief will help reduce IHT payable to the next successor.
What is the purpose of business relief?
Business Relief (BR) is a crucial aspect of Inheritance Tax (IHT) legislation in the UK. Its primary purpose is to ensure that businesses are not heavily burdened by tax when passed on to heirs after the owner’s death.
The relief can be either 100% or 50%.
What are the disqualifications rules for business relief?
-securities
-stocks and shares
-land and buildings
-IF the building is under sale at time of death.
