Taxation Topic 4 - Inheritance Tax Flashcards
What are the 2 main laws relating to IHT
- Finance act 1986
- Inheritance tax Act 1984
Who pays IHT
IHT applied to anyone who is UK domiciled, anyone who is not UK domiciled only pays it on UK assets.
What is the rules around IHT and contributing to charity, what benefit does this have for your estate
IHT reduced to 36% if at least 10% of the estate is left to charity
When is RNRB reduced and by how much
- RNRB is reduced by £1 for every £2 that the estate (in whole) is in excess of £2 million
What is the cumulative principle
All gifts/transfers are added together to reach the NRB collectively.
What checks are done relating to the cumulative principle
If any transfers fall into the last 7 years of their life, then the 7 years previous to that are checked to see if there was any unused NRB at the time of the more recent transfer, meaning a potential 14-year period must be checked if chargeable transfers have been made. Any CLTs are added to the total value of the estate.
What are the exempt transfers
- Transfers between spouses or civil partners
- Small gifts
- Annual exemptions
- Donations to charity
- Wedding and ceremonial gifts
- Gifts made on a regular basis out of income
- Family maintenance
- Death in active service/emergency circumstances
What are the rules around divorce and exempt transfers
- If marriage or partnership breaks down, transfers still exempt until decree is absolute
What is the maximum amount of a ‘small gift’ and how many times can you make a small gift annually
£250
* This gift can be made as many times as they like within the year as long as it is to different people
How much is the annual gift exemption, and for how many years can it be used
- Up to £3,000 each year
- Unused exemption can be carried forward for 1 year only
What are the exemptions for gifts for weddings and ceremonial gifts
- £5,000 if the donation is from a parent of a party to the marriage
- £2,500 if the donation is from grandparent or remote ancestor
- £2,500 if the donation is from one spouse to the other before marriage
- £1,000 if the donor is any other person
What are the qualifications for exemptions around Gifts that are made on a regular basis out of income
- Transfer must be made out of income, be a part of a regular pattern of expenditure and not affect the donor’s standard of living
What are the exemptions surrounding deaths in active service/emergency services
- Estates of people in the army or emergency services are free from IHT if they die of something related to their line of work (wound from army/emergency call out etc.)
What is the time span from a gift being made that taper relief is available
- If the donor dies between 3-7 years of the gift being made, taper relief can be applied
What trusts were affected in terms of IHT in 2006
- IIP trusts
- Bare trusts
- Disabled trusts
- Accumulation and maintenance (A&M) trusts
- Discretionary trusts
How were IIP trusts changed after 2006
Now CLT’s
Subject to regular charge every 10 years and exit charges
How were bare trusts changed after 2006
Any gifts or transfers are PETs and the IHT liability falls absolutely on the beneficiary(s)
How were disabled trusts changed after 2006
- Not considered a relevant property trust – no 10-year charge
- No exit charges providing the asset stays in trust and is in the best interest of the beneficiary
- Transfers into a disabled trust are PETs
What are the main IHT reliefs
- Quick succession relief
- Business relief
- Agricultural relief
- Woodlands relief
What is quick succession relief
- For the instance that an inheritor dies, so the next inheritors get a taper relief style credit on the IHT that would have been paid initially when the first inheritors would have acquired the assets.
What is business relief and how must you qualify for it
This relief is given to qualifying business assets and is given at 100% or 50%.
* To qualify, the donor must have held the relevant property for at least 2 years.
* Any assets that have not been used in the business in the previous 2 years and any assets not needed for future use in the business must be ignored when valuing business property
* Relief not available for businesses that make/deal wholly or mostly in securities, stocks and shares or land and buildings.
What is agricultural relief and how must you qualify for it
- Similar to business relief, available where the transferor had a right to vacant possession of the land, or could obtain it within 24 months at 100%; otherwise at 50%
- Agricultural property is farmland or woodlands plus any farm buildings and appropriate residential property (excludes animals or equipment)
- Land must have been farmed by transferor for previous 2 years or owned for last 7 years if farmed by someone else
What is woodlands relief and its requirements
- 100% available after 2 years of ownership and management of woodland as a business
- If woodlands have not been operated as a business, providing the owner had owned for at least 5 years, a form of deferral of IHT is available by election
- This relief excludes and value of timber, property or land. Land may be subject to agricultural relief
- If property has been owned for 5 years, payment of IHT can be deferred until timber has been sold, and any charges included in this can be deducted from the bill
What is pre-owned assets tax (POAT)
A charge to income tax on benefits received by a former owner of certain types of property. It is an income tax on certain IHT planning schemes, the property within the scope can broadly come under 3 headings:
- Land
- Chattels
- Intangible property
