UNIT 3 - Inheritance Tax Flashcards
A man has been making various lifetime transfers for the past 10 years. Each year on 7 April he has given £50,000 from his savings to his son. He also gives each of his three grandchildren £100 on their birthdays (which are in September and October). Additionally, in May of this tax year he put £300,000 into a discretionary trust for the benefit of his grandchildren.
Which of the following best describes the man’s inheritance tax position in relation to the transfers made in this tax year?
A) He has made potentially exempt transfers of £47,000.
B) He has made potentially exempt transfers of £50,000.
C) He has made potentially exempt transfers of £50,300.
D) He has made lifetime chargeable transfers of £350,000.
E) He has made lifetime chargeable transfers of £350,300.
CORRECT ANSWER A - The £100 to each of the grandchildren is covered by the small gifts exemption. The transfer into the discretionary trust is immediately chargeable and is not a potentially exempt transfer (PET). The first £3,000 of the transfer to the son is exempt which leaves £47,000 as a PET.
Option B is wrong as it has not deducted the annual exemption.
Option C is wrong as it has added in the £300 gifts covered by the small gifts exemption and not deducted the annual exemption.
Option D is wrong as it has included the potentially exempt transfer as chargeable and has not deducted the £3,000 annual exemption.
Option E is wrong as it has included the £300 gifts covered by the small gifts exemption and the potentially exempt transfer as chargeable and has not deducted the £3,000 annual exemption.
A testator made a valid will six months ago which included the following gifts of company shares:
‘I give to my nephew all my shares in AB plc.’
‘I give to my niece all my shares in XY plc.’
‘I give to my daughter all my shares in DEF Limited.’
The testator died last week. All of these beneficiaries survived the testator, and the testator owned all of the above-mentioned shares.
The shares in AB plc were purchased 18 years ago and represent a 30% shareholding in the company, which makes clothing and is listed on the London Stock Exchange. The shares in XY plc were purchased 10 years ago and represent a 10% shareholding in the company, which makes vehicles and is also listed on the London stock exchange. The shares in
DEF Limited were inherited from the testator’s father 25 years ago and represent a 45% shareholding in the testator’s family private company which makes bathroom fittings.
Which of the following best explains whether these gifts qualify for business property relief for inheritance tax?
A) All three gifts will attract business property relief at the rate of 100%.
B) The gift of shares in AB plc and XY plc will both attract business property relief at the rate of 50% and the gift of shares in DEF Limited will attract business property relief at the rate of 100%.
C) The gift of shares in AB plc and the gift of shares in DEF Limited will both attract business property relief at the rate of 50% but the gift of shares in XY plc does not qualify for the relief.
D) All of the three gifts will attract business property relief at the rate of 50%.
E) The gift of shares in AB plc and XY plc do not qualify for business property relief but the gift of shares in DEF Limited will attract business property relief at the rate of 100%.
CORRECT ANSWER E - as in order to qualify for business property relief the shares must be owned for at least two years before death and the company must be a trading company (satisfied for all of the shares) but if the shares are in a company listed on a recognised stock exchange, the owner must have had voting control of the company, which is not the case here. This is not required for an unquoted company, where the relief is 100%.
Option A is wrong as although the unquoted shares attract 100% relief, the quoted shares only attract 50% if they give the owner control of the company.
Option B is wrong as the unquoted shares attract 100% relief, and the 30% holding does not give voting control of AB plc.
Option C is wrong as although XY plc shares do not attract any relief, neither do the AB plc shares and the unquoted shares attract 100% relief.
Option D is wrong as the unquoted shares attract relief at 100% and the quoted shares do not attract any relief as they do not give voting control.
A man, who never married or formed a civil partnership, died owning the following assets, which he left to his friend: a yacht (worth £500,000), bank accounts (worth £200,000), and chattels (worth £70,000). The deceased had debts and funeral expenses totalling £20,000. The only lifetime transfer made by the deceased was a 21st birthday gift of £15,000 to his niece one year before he died. At the relevant time the nil rate band was £325,000 and annual exemption £3,000.
What is the amount of inheritance tax payable on the deceased’s estate?
A) £170,000.
B) £176,000.
C) £173,600.
D) £174,800.
E) £181,600.
CORRECT ANSWER C - as the chargeable estate is £750,000. The potentially exempt transfer to the niece, after deducting two annual exemptions, is £9,000 and so there is only £316,000 nil rate band available, leaving the remaining £434,000 to be taxed at 40% = £173,600.
Option A is wrong as it has not included the effect of the potentially exempt transfer on the nil rate band.
Option B is wrong as it has omitted the annual exemptions in relation to the potentially exempt transfer.
Option D is wrong as it has included only one annual exemption.
Option E is wrong as it has not deducted debts from the value of the estate.
George dies leaving his family home worth £650,000 to his wife, his portfolio of quoted shares worth £150,000 to his son with the residue of his estate to the National Trust. He had made no lifetime transfers.
TRUE OR FALSE:
No IHT is payable on George’s death estate.
TRUE - IHT is charged on the value of the death estate after deduction of exemptions and reliefs. Everything passing to George’s wife attracts the spouse exemption and everything passing to the National Trust attracts the charity exemption. Therefore, only the assets passing to George’s son are chargeable to IHT.
George had made no lifetime transfers so the whole of the nil rate band of £325,000 is available. The assets passing to his son are taxed at 0%.
Faraz gives £6,000 to his daughter in May 2024 and £6,000 to his son in June 2024. He has made no previous lifetime transfers.
TRUE OR FALSE: The gift to Faraz’s son is a potentially exempt transfer
TRUE - The gift to Faraz’s daughter uses Faraz’s annual exemption for tax years 2024/25 and 2023/24. The whole of the transfer to Faraz’s son is, therefore, a potentially exempt transfer.
Frank has just died. His half interest in the family home passes to his wife by survivorship. His will leaves everything else to his four children.
Which of the following assets is NOT included in Frank’s estate for IHT purposes?
A) Frank’s half interest in the family home.
B) Frank’s portfolio of shares.
C) The proceeds of an insurance policy on Frank’s life, the benefit of which Frank had assigned to his children two years ago.
D) Frank’s car.
E) The money in Frank’s bank account.
CORRECT ANSWER C - The “estate” for IHT is everything to which the deceased was beneficially entitled immediately before death. Immediately before his death Frank was beneficially entitled to everything except the life policy, which he gave to his children two years earlier.
In May 2023 Sheila (a divorcee) gave £500,000 to her son to help him set up a new business. In July 2024 she gave £4,500 to her daughter as a wedding gift. Sheila died in September 2024.
TRUE OR FALSE:
No inheritance tax is payable on the gift to Sheila’s daughter.
TRUE - Lifetime gifts on marriage are exempt up to £5,000 where the donor is a parent of a party to the marriage.
Arthur dies in July 2024 leaving everything to his son, Derek. Derek has provided a list of assets for Arthur made up of a house worth £400,000, a portfolio of quoted shares worth £60,000, an insurance policy paying out £90,000 which he assigned to Derek nine years ago and bank accounts with balances totalling £32,000. He had credit card bills and utilities bills unpaid, amounting to £8,000. Arthur’s wife, Milly, died ten years ago, leaving all her estate to Arthur. Neither Arthur nor Milly made any lifetime gifts (apart from the assignment of the insurance policy mentioned above).
Which of the following is the correct value transferred of Arthur’s estate for IHT purposes?
A) £582,000
B) £574,000
C) £492,000
D) £484,000
E) £84,000
CORRECT ANSWER D - The insurance policy was assigned to Derek, so Arthur was not beneficially entitled to it at the date of his death. It is therefore not included in the value of his estate.
Value of estate:
house £400,000
shares £60,000
bank accounts £32,000
Less unpaid bills (£8,000)
£484,000
Megan dies in August 2024 leaving everything to her daughter, Janet. At the time of her death Megan owned her home worth £500,000 and had bank accounts with balances totalling £40,000. She had credit card bills and utilities bills unpaid, amounting to £4,000. Megan was divorced. Megan did not make any lifetime gifts. None of the assets in Megan’s estate qualifies for any relief or exemption.
Which of the following is the correct amount of IHT payable on Megan’s estate?
A) Nil.
B) £14,400.
C) £18,000.
D) £86,400.
E) £218,000.
CORRECT ANSWER B - As Megan’s home passes to her daughter, Megan’s estate qualifies for the residence nil rate band (£175,000). Megan’s estate can take the benefit of the whole nil rate band (£325,000).
Home 500,000
Bank accounts 40,000
Bills (4,000)
Total 536,000
£500,000 of the estate is taxed at 0%. The balance of £36,000 is taxed at 40%. £36,000 x 40% = £14,400
Dominic owns a valuable oil painting. He gives this painting to his grandson, Angus, as a 21st birthday present. The painting remains on display in Dominic’s home. Dominic dies sometime later.
TRUE OR FALSE: The painting will not be included in the calculation of Dominic’s estate as it belongs to his grandson, Angus.
FALSE - It is likely that even though Dominic gave the painting to Angus during his lifetime, he did not transfer “possession and enjoyment” as the painting remained on display in his home.
Jemima, who is single, dies in September 2024 and leaves everything to her daughter. Her estate for IHT is £300,000 and there are no exemptions and reliefs. The estate does not include any qualifying residential interest.
Three years before her death she gave her daughter £146,000. Apart from this, she has made no lifetime transfers.
Which of the following is the correct amount of IHT payable on Jemima’s death estate?
A) £120,000.
B) £48,400.
C) £46,000.
D) £6,000.
E) Nil.
CORRECT ANSWER C - The value of her death estate is £300,000 and there are no exemptions and reliefs. The residence nil rate band is not available as the estate did not include any qualifying residential interest.
The first £6,000 of the lifetime gift was exempt (two years’ annual exemptions). The remaining £140,000 was a potentially exempt transfer which has become chargeable. Therefore, only the first £185,000 of Jemima’s death estate is taxed at 0% and the remaining £115,000 is taxed at 40%.
n the same day in June 2024 Wisan gives £600,000 to his grandson and pays £100,000 to a discretionary trust.
Apart from making gifts on 6 April each tax year to use his annual exemption Wisan has never made any other lifetime transfers.
Which of the following statements is CORRECT?
A) No IHT is payable on the two gifts.
B) £120,000 IHT is payable on the gift to the grandson.
C) No IHT is payable on the gift to the grandson, but £20,000 IHT is payable on the payment to the discretionary trust.
D) £110,000 IHT is payable on the gift to the grandson.
E) £40,000 IHT is payable on the payment to the discretionary trust.
CORRECT ANSWER A - The gift of £600,000 to his grandson is a PET and is not yet chargeable. The gift of £100,000 into a discretionary trust is a LCT. This is chargeable at the date of the gift. However, there are no other chargeable lifetime transfers in the seven years before the date of this gift so Wisan’s full nil rate band is available. The gift into the discretionary trust will fall within Wisan’s nil rate band. No inheritance tax is payable at the date of these gifts.
In July 2024, Fred gives his son his shares in Abacus Bathroom Co Ltd worth £340,000. The company manufactures bathroom fittings. Fred has owned the shares for 10 years.
On the following day Fred gives his daughter his portfolio of small shareholdings in various quoted shares worth £350,000.
Fred dies in December 2024. His son and daughter still own the shares he gave them.
Fred made no other lifetime transfers.
Which of the following statements is correct?
A) Business property relief will be available on both transfers.
B) IHT will be payable at 40% on the whole of the transfer of quoted shares because the earlier transfer to the son has exhausted Fred’s nil rate band.
C) Business property relief at 50% will be available on the transfer of quoted shares.
D) Business property relief at 100% will be available on the transfer of unquoted shares.
E) Business property relief is not available for either transfer.
CORRECT ANSWER D - There is no BPR on transfers of quoted shares unless the transferor had a controlling interest. Fred could not have had a controlling interest in a quoted company with shares of such a low value.
BPR is available at 100% on the transfer of the unquoted shares.
The business is trading in nature. Fred owned the shares for two years before the transfer and his son still owned the shares at the date of his death.
Because the transfer of the unquoted shares qualifies for 100% relief, Fred’s nil rate band is unaffected by the transfer and the first £325,000 of the transfer to his daughter is at 0%.
A testator died last week. Amongst the testator’s assets is a house which the testator and his sister owned as beneficial joint tenants. At the time of the testator’s death the house was worth £800,000 and was not subject to any mortgage.
What is the value of the house for IHT purposes?
A) £800,000.
B) £400,000.
C) £800,000 less a discount of up to 15%.
D) Nil.
E) £400,000 less a discount of up to 15%.
CORRECT ANSWER E - The testator was beneficially entitled to half the value of the
property immediately before death. However, the special valuation rule which applies
to land allows a small discount for IHT purposes
A testatrix left a valid will in which she gave her house (valued at £400,000) to her brother and the remainder of her estate (which comprises money in various accounts totalling £350,000) to her sister.
The testatrix had no debts. Five years before her death the testatrix put £200,000 into a discretionary trust for the benefit of her nieces and nephews. The testatrix made no other lifetime transfers.
The testatrix never married nor entered a civil partnership.
How much IHT is payable on the estate?
A) £123,800
B) £170,000.
C) £247,600.
D) £250,000.
E) £300,000.
CORRECT ANSWER C - The lifetime gift was an LCT made within seven years of death.
The LCT takes the benefit of the annual exemption for the year in which it was made
and the unused annual exemption for the previous year – a total of £6,000. The
effect of the LCT is therefore to reduce the NRB available for the death estate by
£194,000.
The death estate is £750,000
First 131,000 x 0%
Balance of £619,000 40% = £247,600
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