UNIT 3: IHT

Question 1

Charge to tax?

Answer 1

• Governing statute - Inheritance Tax Act 1984
• Three main situations where IHT may be charged:
  
  1. Death
     
     1. IHT is primarily intended to take effect at death
     2. Aims to levy a tax on the wealth a person has acquired over their lifetime
     3. Operation - when an individual dies, IHT is charged on the value of their estate (broadly, assets minus liabilities), subject to various exemptions and reliefs
  2. Lifetime gifts made to individuals within 7 years prior to death:
     
     1. Aims to reduce tax avoidance
     2. IHT will be charged on certain lifetime gifts/’transfers’ if the donor dies within 7 years after making them
     3. AKA ‘potentially exempt transfers’ because:
        
        1. at the time the transfer is made, no IHT is chargeable
        2. if the transferor survives for 7 years, the transfer is fully exempt
        3. if the transferor dies within 7 years, the transfer becomes chargeable
  3. Lifetime gifts to a company or into a trust:
     
     1. A lifetime gift to a company or into a trust is immediately chargeable to IHT when it is made
     2. Exception - where the trust is for a disabled person

Question 2

Cumulation calculation?

Answer 2

o To calculate the available nil rate band on any transfer, whether during lifetime or on death:
 Must look back over the 7 years immediately preceding the transfer
 Chargeable transfers made by the transferor during that period must be taken into account to determine how much of the nil rate band is remaining (’cumulation’)
o Since the residential nil rate band is not available for lifetime transfers, it will be available in full on death, subject to any adjustments in relation to estates over £2 million