Unit 3 Flashcards
What are the 3 main occasions when IHT may be charged?
1) Death
2) Lifetime gifts made to individuals within 7 years prior to death (PETS)
3) Lifetime gifts to a company or into a trust (LCTs)
PETS
– IHT charged on lifetime gifts or transfers if the donor dies within 7 years after making them.
– These are called PETS (potentially exempt transfers) because at the time when the transfer is made, no IHT is chargeable; and the transfer is ‘potentially exempt’.
– If the transferor survives for 7 years, the transfer becomes exempt. If the transferor dies within that period, the transfer becomes chargeable.
LCTS
IHT can be avoided by use of a trust/corporate entity.
Lifetime gift to a company or into a trust is immediately chargeable to IHT at the time when it is made, unless the trust is for a disabled person.
What are the 3 categories of property passing under the estate for IHT purposes?
1) Property which passes under the deceased’s will or intestacy
2) Property to which the deceased was beneficially entitled immediately before death, but which does not pass under will or intestacy (e.g., deceased’s interest in any joint property passing on death by survivorship to the surviving joint tenants)
3) Property included because of statutory provisions:
– Certain trust property; and
– Property given away by the deceased during lifetime, but which is subject to a reservation at the time of death.
What property is included in the estate by statute?
1) Trust property
2) Property subject to a reversion
What is a qualifying interest in possession?
An interest where the beneficiary is entitled to claim the income from the trust property with no power on the part of the trustees to decide whether or not the beneficiary should receive it (i.e., a vested life interest).
How are qualifying interets in possession treated for IHT purposes?
As beneficially entitled to the capital which produces that income.
This means that where a beneficiary who has a qualifying life interest in a trust, the trust fund is taxed as though it were part of the beneficiary’s estate.
– An interest in possession arising before 22 March 2006 is a qualifying interest in possession.
- Where an interest in possession arises on or after 22 March 2006 – it will only be a qualifying interest in possession in limited circumstances:
– E.g., where there is an ‘immediate post-death interest’ (IPDI).
IPDI = an interest in possession arising on the death of the settlor under their will or intestacy.
What is property is subject to a reversion?
- Rule applies where the deceased gave away property during their lifetime but did not transfer ‘possession and enjoyment’ of the property to the done or was not entirely excluded from enjoying the property.
– If property is subject to a reversion at the time of the donor’s death, the donor is treated as being ‘beneficially entitled’ to the property
Rule designed to prevent people avoiding tax by parting with ownership of the property but continuing to enjoy the benefit.
What property passes outside the estate for IHT purposes?
Property which the deceased did not have a beneficial interest in falls outside the definition of ‘estate’.
2 common examples:
- Life assurance police once it is written in trust for a named beneficiary (because the proceeds are no longer payable to the deceased’s estate).
- Discretionary lump sum made from a pension fund to the deceased’s family (because the pension trustees are not obliged to pay it to the deceased’s estate).
What is excluded property for IHT purposes?
– Reversionary interests
= for IHT purposes this means a future interest under a settlement, e.g., an interest in remainder under a trust created before 22 March 2006.
–Reversionary interests are excluded from the estate for IHT purposes.
What is the basic valuation principle for assets in the estate?
General rule = Assets in the estate are valued for IHT purposes at ‘the price which the property might reasonably be expected to fetch if sold in the open market’ immediately before the death.
– This means the value immediately before death of every asset forming part of the estate must be assessed and reported to HMRC.
– Negotiations may be required with HMRC to reach an agreed valuation.
– Value of an asset agreed for IHT purposes is called ‘probate value’.
What is ‘probate value’?
Value of an asset agreed for IHT purposes.
Should the probate value of land as a class of assets be discounted for IHT purposes?
Yes.
Commercial property = 10% discount
Residential property = 15% discount (higher may be allowed if very small house).
What is the modification of the basic valuation principle?
General rule = Where the death causes the value of an asset in the estate to increase or decrease, that change in value should be taken into account.
How should the PRs value quoted shares?
General rule = Value of quoted shares is taken from the Stock Exchange Daily Official List for the date of death (or the nearest trading day).
- The list quotes 2 prices.
- To value the shares for IHT, take one-quarter of the difference between the lower and higher price and add it to the lower price.
- E.g., if at the date of death, the quoted price per share is 102p/106p, the value of each share for IHT is 103p.
Should debts & expenses be deducted for IHT purposes?
Yes.
General rule = Liabilities owed by the deceased at the time of death are deductible for IHT purposes, provided that they were incurred for money or money’s worth.
- E.g., debts like gas and telephone bills may be deducted.
- Income tax which has not yet been paid can be deducted.
After assessing the probate value of the estate what should you do next?
Apply relevant exemptions & reliefs.
What are the relevant exemptions and reliefs?
Exemptions:
1) Spouse / civil partner
2) Charity exemption
Releifs:
1) Business Property Releif
2) Agricultural property releif
How does 1) Spouse / civil partner exemption apply?
General rule = any property included in the estate for IHT purposes is exempt if it passes to the deceased’s spouse or civil partner under the deceased’s will or intestacy, or in the case of joint property, by survivorship.
- If the transferor is domiciled in the UK but the transferee is not, the level of the exemption is limited to £325,000.Alternatively, the transferee can elect to be treated as a UK-domiciled for IHT purposes and so receive the full exemption.
- The rule applicable to qualifying interest in possession trusts is that IHT is charged as if the person with the right to income owned the capital. This rule applies for the purpose of spouse exemption, both on creation of the trust (whether by will or on intestacy) and on the death of a life tenant.
Exemption only applies to spouses and civil partners. It does not apply to cohabitants, however long the relationship.
Holland (Executors of Holland Deceased) v IRC – An unmarried couple had lived together for 31 years. Were not entitled to the spouse exemption.
How does 2) Charity exemption apply?
General rule = Any property forming part of the deceased’s estate for IHT purposes which passes on death to charity is exempt.
- Exemption most commonly applies to property which passes to charity under the deceased’s will.
- Also applies if the deceased had a life interest in trust property which passes under the terms of the trust to charity.
- Similar exemption applies to gifts to certain national bodies and bodies providing a public benefit, such as museums and art galleries, and to political parties.
Note – When large charity gifts are made by the deceased, not only is the transfer itself exempt, but it may affect the tax rate on the rest of the death estate.
How does 1) Business property relief apply?
Business property relief (BPR) = operates to reduce the value transferred by a transfer of value of relevant business property by a certain percentage.
a) A reduction of 100% of the value transferred is allowed for transfers of value where the value transferred is attributable to the following kinds of relevant business property (i.e., no charge to IHT in respect of those assets):
- A business or an interest in a business (including a partnership share);
- A company shares that are not listed on a recognised stock exchange.
b) A reduction of 50% of the value transferred is allowed for transfers of value where the value transferred is attributable to any other relevant business property (i.e., the following):
- Company shares that are listed on a recognised stock exchange if the transferor had voting control of the company immediately before the transfer;
- Land, buildings, machinery, or plant owned by the transferor personally but used for business purposes by a partnership of which the transferor is a member, or by a company (whether quoted or unquoted) of which the transferor has voting control.
What is “voting control” in relation to business property relief?
Ability to exercise over 50% of the votes on all resolutions.
– Separate shareholdings of spouses can be taken as one, so that if the combined percentage of the votes gives the couple voting control, the test is satisfied.
What is the time limit for business property relief?
General rule = Assets must have been owned by the transferor for at least 2 years at the time of the transfer.
Or, must be a replacement for relevant busines sproperty where the combined period of ownership is 2 years.
What is agricultural property relief?
APR = reduces the agricultural value property by a certain percentage.
“Agricultural value” = Value of the property if it were subject to a perpetual covenant prohibiting its use other than for agriculture.
– This will be significantly less than its market value (e.g., if for example, the land has development potential, for housing).
– The part of the property’s value which is over and above its agricultural value will not qualify for any agricultural property relief but may qualify for business property relief if the relevant requirements are satisfied.
What reduction is allowed for APR?
Reduction
- Reduction of 100% is allowed where:
- Either the transferor had the right to vacant possession immediately before the transfer or;
- Where the property was subject to a letting commencing on or after 1st September 1995.
- Reduction of 50% is allowed in other cases.
What are the 2 further conditions for APR to apply?
- Either the property was occupied by the transferor for the purposes of agriculture for the 2 years prior to the transfer or;
- It was owned by the transferor for 7 years prior to the transfer and was occupied by someone throughout that period for the purposes of agriculture.
After applying releiefs and exemptions what should you do?
Calculate the tax at the appropriate rate
What is the Nil Rate Band (NRB)?
General rule = If deceased has made no chargeable transfers in the 7 years prior to death, the rate of tax on the first £325,000 of the estate is 0% (the NRB).
- Normal rate = If the estate exceeds the NRB, IHT is charged on the excess at 40%.
- Special rate = Special rate of 36% may apply where:
- At least 10% of a defined ‘component’ of a person’s net estate (after deduction of other exemptions, reliefs and the available NRB) passes to charity.
