Topic 10- Inheritance Tax

Question 1

When would IHT be charged?

Answer 1

On a transfer of value
Chargeable property
By a chargeable person

Arising on:
Some lifetime gifts - taxed immediately
Some lifetime gifts where donor dies within 7 years
On death of an individual

Question 2

State the exempt transfers

Answer 2

Small gift exemption (no more than £250pp per tx yr)
Marriage exemption
- £5,000 by parent
-£2,500 by grandparent
£1,000 by anyone else

Normal expenditure

• Christmas
• Birthdays
• School fees

Annual Exemption
£3000 per tax year applied chronologically

Unused annual exemptions carried forward to the next year only - can only use after current year’s annual exemption.

Inter-spouse exemptions
- Transfers between spouses are exempt.

Question 3

How is a Diminution in value (transfer of value) calculated?

Answer 3

Value of estate before gift: X
Value after gift: (X)
Diminution in value. = X

Question 4

Explain what a PET is?

Answer 4

Potentially exempt transfer - will be exempt unless Donor dies within 7 years of the gift.

Question 5

Explain what a CLT is

Answer 5

A Chargeable lifetime transfer - a gift by an individual into a trust. Possible inheritance tax to pay on transfer, and possible extra if the donor dies within 7 years.

Question 6

How does the nil rate band work?

Answer 6

Where the NRB is available, CLT’s will not be charge to IHT.

The NRB available is reduced by the amount of any Gross Chargeable transfers which have occured in the 7 years prior to the date of the gift.

Question 7

What’s the gross chargeable transfer?

Answer 7

Chargeable amount of CLT plus tax paid by the donor

Question 8

What tax rates do the Donor and Donee pay respectively?

Answer 8

Donee pay tax of 20%

Donor pays tax of 25%.

Question 9

How do you calculate the lifetime IHT on a CLT?

Answer 9

CLT - Chargeable amount
Less:
(NRB £325,000 -Less GCT within 7 years before gift)

Charged at 20% if Donee or 25% if Donor pays tax

Question 10

What are the due dates of payment of lifetime IHT?

Answer 10

Date of CLT: 6th April to 30th Sept.
Payment date: 30th April following year

Date of CLT: 1 Oct to 5th April
Payment Date: 6 months after end of the month of CLT

Question 11

IHT payable on life time gifts as a result of death:

Who pays the tax?

Answer 11

Trustees or the donee

Question 12

How do you calculate IHT on lifetime gifts on death

Answer 12

Gross Chargeable amount from step 1. X
NRB at death (always £325,000) x
Less:
GCT’s < 7 years before gift.
CLT’s and PETS now chargeable. (x)
Taxable amount x

IHT @ 40% X
Less taper relief (X)
Less IHT paid in lifetime on CLT (X)

IHT Payable X

Question 13

What is the proforma for the death estate? (Step 3)

Answer 13

Freehold Property
Less:
Repayment/interst only mortgage

Business owned by sole trader
Stocks and Shares
Govnt Securities
Insurance Policy Proceeds
Leasehold property
Motor cars
Personal assets/ antiques
Debts due to deceased
Cash and bank deposits

Less:
Debts Due by deceased
Outstanding taxes apart from IHT
Funeral expenses

Less:
Exempt legacies

= Gross chargeable estate
RNRB (x)
NRB at date of death X
Less GCT < years of death (x)
NRB Remaining (x)
Taxable estate X
@ 40%

Due six months after the end of the month of death.

Question 14

Addition exemptions: Political Party

How much is exempt and what are the conditions

Answer 14

These transfers are exempt up to any amount as long as the political party qualifies.

Conditions:
2 members were elected to the House of Commons; OR
1 member was elected and at least 150,000 votes were cast for the party.

Question 15

There is no limit on inter-spouse exemptions except ….

Answer 15

The transferor is UK dom and transferre is Non UK dom.

Exemption limit is £325,000.

Alternatively an election can be made for NON UK dom spouse to be deemed UK so all transfers are exempt.

Question 16

Charity exemption condition?

Answer 16

Exempt up to any amount but has to be a recognised UK charity.

Question 17

How much would have to be left to charity to be considered large, and what is the impact?

Answer 17

10% of net estate is large.

Reduces estate AND taxed at 36% rather than 40%.

Question 18

When would Fall in value (FIV) relief occur?

Answer 18

a) When a PET becomes chargeable on the death of the Donor; or
b) Additional tax payable re a CLT.

The chargeable amount is fixed at the date of gift.

If there is a decrease in value between the date of gift and the date of death, then relief is available.

Question 19

What are the conditions of FIV relief?

Answer 19

The asset is still owned by the recipient at the date of the donor’s death; OR

The asset was sold at arm’s length before the donor died.

Not available for wasting chattels (expected to depreciate)

Question 20

How does FIV relief operate?

Answer 20

1. Deduct the fall in value from the Gross Chargeable Transfer

FIV = difference between value of asset at gift less value at date of death or sale (if earlier).

2. The reduced amount is used when calculating the tax on the lifetime transfer as a result of donors death
3. Original gross chargeable transfer amount is used when calculating the tax due on subsequent lifetime transfers on the death estate.

Question 21

When would you use the Residence nil rate band?

Answer 21

Where a main residence is inherited on death by direct descendants. £175,000 RNRB is available but can only use amount of value of residence.

RNRB is transferable to a surviving spouse or civil partner.

Question 22

Can you transfer a spouse a unused NRB?

Answer 22

Yeas. The unused % proportionately increase the RNRB by the same %.

This is used for step 2 and 3. Not step 1.

Question 23

What is the time limit for the transfer of the NRB?

Answer 23

Executor claims the transfer by submitting IHT return by the later of:

2 years from second death
3 months from executors starting to act.