The law and practice of Inheritance Tax in the context of lifetime gifts and transfers on death

Question 1

What are the four steps for calculating IHT?

Answer 1

1. identify the transfer of value
2. find the value transfered
3. apply any relevant exemptions.
4. calculate the appropriate tax.

Question 2

When will a person who owns an interest under a trust have the trust property included in their estate for purposes of IHT?

Answer 2

A person who is entitled to income from a trust will be treated for IHT purposes as being beneficially entitled to the whole capital if they have a qualifying interest in possession (for interests in possession arising on of after 22 March 2006).

Question 3

A person transfers ownership of a painting to their daughter but retains the painting at their house. Is the painting charged as part of their estate for IHT purposes?

Answer 3

Yes, as the person has not transferred possession and enjoyment of the property.

Question 4

What property is treated outside of an estate for IHT purposes?

Answer 4

Where property is held as joint tenant’s, the surviving JTs share will pass outside of the estate however IHT is payable on the deceased’s share.
Where a life assurance person is written in trust for another person.

Question 5

How is the value of an item calculated for the purposes of inheritance tax?

Answer 5

The price at which the property might reasonably be expected to fetch if sold in the open market.

Question 6

How is the value of quoted shares calculated?

Answer 6

Taken from the Stock Exchange Daily Official List for date of death.

Two prices will be quoted.

Take 1/4 of difference between lower and higher price and add to the lower price.

Question 7

How are debts and funeral expenses taken into account for IHT purposes?

Answer 7

They are deductible from value of transfer.

Question 8

What IHT is payable on transfer to a spouse?

Answer 8

Transfer of value is exempt (includes joint property and property passing under the will).

If the transferor lives in the UK but transferee does not, exemption limited to £325,000.

Question 9

What IHT applies to gifts to charity?

Answer 9

Gifts to charity are exempt.

Question 10

What property attracts a relevant business property relief of 100%?

Answer 10

Business or interest in a business or company shares that are not listed on a recognised stock exchange (unquoted shares)

Must have been owned by the transferor for two years before transfer.

Question 11

What property attracts a relevant business property relief of 50%?

Answer 11

Shares in listed companies (quoted shares) which give the individual voting control over the company (so rare).

Land, buildings, plant and machinery owned by transferor but used for business purposes where transferor has voting control of company.

Question 12

What is the agricultural value of property in relation to agricultural property relief?

Answer 12

Value of the property if it were subject to perpetual covenant prohibiting use other than for agriculture (less than market value).

Question 13

When is a reduction of 100% applied to agricultural property?

Answer 13

When transferor has right to vacant posession immediately before transfer or subject to letting commencing on or after 1 September 1995.

Must have owned the property for more than 2 years prior to transfer.

Question 14

When is a reduction of 50% applied to agricultural property?

Answer 14

All other cases not listed above.

Must have owned the property for more than 2 years prior to transfer.

Question 15

What is the nil rate band for IHT on death?

Answer 15

0% applies to the first £325,000

Question 16

What is the normal rate band for IHT on death?

Answer 16

40%

Question 17

What is the special rate for IHT on death?

Answer 17

36% only applies when at least 10% of defined component of estate goes to charity.

Question 18

When might a NRB of £650,000 be applied?

Answer 18

When a married person dies having survived a spouse of civil partner and the parter died having not used their NRB.

Question 19

What is the residence nil rate band?

Answer 19

Applies to deaths occurring after 6 April 2017.

Deceased must die owning a qualifying interest which is closely inherited.

Qualifying interest - residential house

Closely inherited must pass to lineal descendent, current spouse of lineal descendent or widow unless they have remarried.

0% is applied to first £175,000.

Any unused RNRB can be claimed by a surviving spouse.

Question 20

What is PET?

Answer 20

Any gift made by an individual to another individual which will become chargeable upon death.

Question 21

Two assets have a market value of £50,000 together but £15,000 separately. How do the related property rules apply to calculate IHT?

Answer 21

Half of the total value is awarded to one asset. So the one asset will be worth £25,000.

Question 22

How much is an annual exemption?

Answer 22

£3000. Can be carried forward for one year so max in any year can be £6000.

Question 23

What is the small gifts exemption?

Answer 23

Gifts of £250 or less in any one tax year to any one person are exempt.

Question 24

What is the normal expenditure out of income exemption?

Answer 24

Lifetime transfer can be exempt if:

made as part of normal expenditure
made out of their income
after allowing for all such payments transferor was left with sufficient income to maintain their usual standard of living.

Question 25

What are the allowances for gifts in consideration of marriage

Answer 25

£5000 by parent to party of marriage
£2,500 by remoter ancestor
£1,000 in any other case

Question 26

What is an LCT?

Answer 26

Transfer into a trust in a person’s lifetime.

Question 27

What rates apply to LCTs in lifetime?

Answer 27

0% on the nil rate band (taking into account the rate on any other LCTs).

20% on the balance of the chargeable interests.

Question 28

When will a PET become chargeable?

Answer 28

If made within 7 years of the death of the transferor.

Question 29

How long must a transferor survive PET gift for it to cease to have any effect?

Answer 29

14 years because any PET affects the NRB of those made within 7 years of each other.

Question 30

What are the rates for tapering relief?

Answer 30

• Transfers within 3-4 years 80% of death charge
• Transfers within 4-5 years 60% of death charge
• Transfers within 5-6 years 40% of death charge
• Transfers within 6-7 years 20% of death charge

Question 31

What is the effect of death of LCT

Answer 31

IHT must be recalculated because PETs made before LCT have now become chargeable so nil rate band may have been used up.

Note to minus the amount of IHT paid at the time of the transfer.

Question 32

What is the estate rate?

Answer 32

The average rate of tax applied to each item of property in the estate.

Question 33

Who is liable for IHT on death?

Answer 33

PRs are liable to pay IT on property which was not immediately before death compromised in a settlement.

PRs are liable to pay IHT on joint property even if it doesn’t vest in them but can claim from the surviving joint tenant.

Question 34

Who is liable for tax on settled property?

Answer 34

The trustees of the settlement - Includes property which was comprised in a settlement immediately before death - relevant where deceased had qualifying interest in possession under a trust

Question 35

What additional liability is attached to PRs in relation to PETs which become chargeable on death.

Answer 35

Person dies within 7 years of making PET and the transfer becomes chargeable the transferee is primarily liable but PRs become liable if the tax is unpaid 12 months at end of month of death.

Question 36

Explain the principle of grossing up IHT when the transferor pays.

Answer 36

This is because IHT is changed on the value of the transfered - the loss to the estate.

If the transferor pays the loss is increased by the amount of the tax paid.

Question 37

When is IHT due on the death estate?

What happens if this is not paid ontime?

Answer 37

6 months after the end of the month of death.

If not paid interest runs on the outstanding amount.

Question 38

What property does the instalment option apply?

Answer 38

Shares, business property and agricultural land - from date each instalment payable.

Other land interest payable with each instalment on amount of IHT outstanding for previous year.

Question 39

What happens when an instalment option property is sold?

Answer 39

All outstanding tax and interest on the property becomes payable.

Question 40

When does IHT on a PET become payable?

Answer 40

Once IHT has become chargeable it is due 6 months after end of month of death.

Question 41

When does IHT on an LCT become payable?

Answer 41

Made between 5 April and 1 October - 30 April.

Outside these dates - 6 months after end of month in which LCT made.

Question 42

What are Disclosure of Tax Avoidance Schemes?

Answer 42

Some schemes must be disclosed to HMRC to allow HMRC to assess effectiveness of a scheme and to introduce measures to counteract it

Question 43

What is the rule on joint property when working out the value of the taxable estate?

Answer 43

Where land is co-owned (whether as joint tenants or tenants in common) the value of the deceased’s share is reduced (by 10-15%) to reflect the difficulty of selling a share of the property rather than the whole.

The deduction is not applied where the co-owners are married, as the related property rules apply and take priority. The valuation of other jointly owned property e.g. chattels does not commonly attract this discount.