W3 Flashcards

Question

How is the amount of the residence nil rate band (RNRB) determined?

Answer 1

The amount of a full residence nil rate band (RNRB) is £175,000. If the deceased's share or interest in the property is worth less than £175,000, the RNRB amount is capped at the value of the property. There is also a tapered withdrawal of the RNRB for estates with a net value of more than £2 million.

Answer 2

A qualifying residential interest (QRI) is a residential property interest that is part of the deceased's estate immediately before death. It includes a dwelling-house that the deceased occupied as their residence at some point during their period of ownership, including property they intended to live in. It does not include rental investment properties in which the deceased never lived.

Answer 3

For example, if a man died this year and left his entire estate (worth £500,000) to his children, including a family home worth £250,000, the conditions for using the residence nil rate band (RNRB) would be met. As the family home is worth more than the RNRB, the full amount of the RNRB (£175,000) is available. Therefore, the man can use both his nil rate band of £325,000 and the RNRB of £175,000, resulting in no inheritance tax to pay on his estate.

Answer 4

Transferring the RNRB works in the same way as transferring the basic NRB. It allows the surviving spouse to increase the value of their RNRB by up to 100% based on the percentage remaining of the deceased spouse's RNRB.

Answer 5

Where a full transfer occurs, an estate may qualify for a RNRB of £350,000 (£175,000 + £175,000).

Answer 6

The tapered withdrawal of the RNRB for net estates worth more than £2 million applies with reference to the total RNRB.

Answer 7

Where the survivor's estate could claim £350,000 RNRB, this amount is reduced by £1 for every £2 in excess of £2m, and no RNRB can be claimed for net estates worth £2,700,000 or more.

Answer 8

For example, if person A died five years ago and left her entire estate to her civil partner B, and B died this year leaving her estate to her daughter C, B's PRs can make a claim for the unused RNRB from A's estate. The total RNRB available for B's death estate is £350,000 (B's own RNRB of £175,000 plus an additional 100% uplift in respect of A's RNRB).

Answer 9

The downsizing addition is an additional amount of the RNRB that allows an estate to qualify for a full RNRB even if the deceased did not own a qualifying residential interest (QRI) when they died or the value of their QRI is less than the RNRB. It is calculated with reference to the amount of the RNRB that would otherwise be lost because the former QRI is no longer owned or a less valuable QRI has taken its place.

Answer 10

To qualify for the downsizing addition, the deceased must have given away their QRI or downsized to a less valuable QRI on or after July 2015, the former home would have been a QRI if it had been retained, and a direct descendant inherits the replacement QRI and/or other assets. The downsizing addition is only relevant if there is no QRI in the estate when the deceased died (but there was historically) or the value of the new QRI following a downsizing move is less than the current maximum RNRB.

Answer 11

A claim for the downsizing addition is made by the PRs within 2 years of the end of the month of death, not when the sale/gift of the former home takes place. However, details of the lifetime sale/gift will be needed by the PRs to bring the claim.

Answer 12

The downsizing rules are not relevant if there is no loss of the RNRB because the value of any new QRI in the estate is the same/more than the maximum available RNRB, or the RNRB is not available because the new QRI or assets are not left to a direct descendant. The application of the rules is complex and beyond the scope of this module but will never produce a total RNRB greater than the maximum otherwise normally available.

Answer 13

It is possible for a person's estate to qualify for a total NRB amount of £1 million.

Answer 14

For example, if A and B are married, and A dies leaving all of their estate to B, and B then dies leaving the whole of their estate to their children, the total combined NRB would be £1 million (£325,000 + £325,000 + £175,000 + £175,000). No IHT would be payable on B's death.

Answer 15

The following steps must be taken in order to calculate IHT on the death estate: 1. Calculate the cumulative total, which is the total chargeable value of all the chargeable transfers made in the previous 7 years. 2. Identify the assets included in the taxable estate. 3. Value the taxable estate. 4. Deduct any debts, including lifetime debts and funeral expenses. 5. Deduct available exemptions and reliefs. 6. Apply the RNRB. 7. Apply the basic NRB and calculate tax.

Answer 16

The cumulative total is the total chargeable value of all the chargeable transfers made in the 7 years prior to the death. It determines how much of the nil rate band (NRB) is available. For example, if a person made chargeable transfers of £20,000 and £5,000 in the last 7 years, their cumulative total would be £25,000, reducing their NRB from £325,000 to £300,000.

Answer 17

The taxable estate includes all property to which the deceased was beneficially entitled at the date of death, including jointly owned property, property subject to a reservation, donationes mortis causa, statutory nominations, and some interests in possession. However, certain items of property may be excluded, such as remainder interests in life interest trusts.

Answer 18

If the deceased had an insurance policy on their own life where the sum payable on death was written in trust for another person, the proceeds of the policy are not included in the deceased's estate for inheritance tax (IHT) purposes.

Answer 19

No, if the deceased was a member of an employer's pension scheme and received a discretionary lump sum payment from the pension fund trustees, it is not included in the taxable estate. These payments are made entirely at the trustees' discretion, and the deceased is not deemed to have any entitlement to the money.

Answer 20

Yes, many pension schemes allow contributors to indicate during their lifetime who should receive the money if the trustees exercise their discretion to make a payment after their death. However, the contributor's expression of wish is not binding on the trustees as the nature of the payment is discretionary.

Answer 21

Assets in the estate are valued at market value at the date of death. However, special rules apply in certain circumstances. For example, related property and joint property may have different valuation rules.

Answer 22

If assets owed by spouses are worth more when valued together (e.g., because they form a set), each party's share is valued at their proportionate share of the combined pair. This rule does not apply when co-owners are married, as the related property rules take priority.

Answer 23

When land is co-owned 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. However, this deduction is not applied when the co-owners are married, as the related property rules apply and take priority.

Answer 24

Debts due at the date of death, such as outstanding balances on credit cards or loans, can be deducted from the value of the estate. Additionally, reasonable funeral expenses and the cost of a tombstone can be deducted as post-death debts/expenses. Other post-death expenses cannot be deducted from the value of the estate for inheritance tax purposes.

Answer 25

Exemptions and reliefs that can be applied to reduce the value of the taxable estate include the spouse exemption, charity exemption, business property relief (BPR), and agricultural property relief (APR). These exemptions and reliefs can help lower the overall tax due on the estate.

Answer 26

The Residence Nil Rate Band (RNRB) is an additional inheritance tax allowance that can be applied when a qualifying residential interest (such as a house) is passed to direct descendants. If the estate does not qualify for the RNRB, it is not considered in the calculation of inheritance tax.

Answer 27

The tax due on the taxable estate is calculated by applying the available exemptions and reliefs, such as the spouse exemption and the basic Nil Rate Band (NRB), to the remaining taxable value. The tax rate of 40% is then applied to the amount above the NRB to establish the total inheritance tax due.

Answer 28

Inheritance tax exemptions and reliefs are used to reduce or eliminate the charge to inheritance tax. They can be applied to lifetime transfers (such as failed PETs or LCTs) and the death estate. Each exemption and relief has specific criteria that must be met in order to be used.

Answer 29

Exemptions and reliefs should be considered when clients engage in personal tax planning, have a liability to pay tax, make a will or set up a trust. It is important for practitioners to advise on the effective use of exemptions and reliefs to ensure proper tax planning.

Answer 30

Some common exemptions and reliefs in inheritance tax include the spouse exemption, charity exemption, family maintenance exemption, annual exemption, small gifts allowance, business property relief (BPR), agricultural property relief (APR), and taper relief.

Answer 31

The different exemptions and reliefs that can be used to reduce or eliminate the charge to inheritance tax include: annual exemption, family maintenance exemption, small gifts exemption, marriage exemption, normal expenditure out of income exemption, taper relief, woodlands relief, quick succession relief, spouse exemption, charity exemption, business property relief, agricultural property relief, political party exemption, and exemptions for gifts for national purposes or to heritage maintenance funds.

Answer 32

Business property relief (BPR) reduces the inheritance tax payable on qualifying business property. It is considered a relief rather than an exemption. The effect of BPR is to reduce the value of a taxable transfer by the amount attributed to the business property. BPR applies to unquoted shares, quoted shares (if the taxpayer had control of the company), business or interest in a business, and assets owned by the taxpayer but used for business purposes.

Answer 33

Qualifying business assets for business property relief (BPR) include unquoted shares (all private company shares), quoted shares (if the taxpayer controls the company), business or interest in a business (sole trader or partnership interest), and assets owned by the taxpayer but used for business purposes. The rates of relief for qualifying assets vary depending on the type of asset.

Answer 34

Agricultural property relief (APR) and business property relief (BPR) are both inheritance tax reliefs that can apply to qualifying assets. APR reduces the inheritance tax payable on the agricultural value of qualifying assets, while BPR reduces the inheritance tax payable on qualifying business property. In scenarios where both reliefs would apply, APR takes priority over BPR. It is not possible to claim BPR on an asset that also qualifies for APR.

Answer 35

To qualify for agricultural property relief (APR), the property must have been occupied for agricultural purposes by the transferor throughout the two years immediately before the transfer, or owned by the transferor and occupied by them or another for agricultural purposes throughout seven years immediately before the transfer. There are exceptions to the two-year rule, such as when qualifying assets are sold and replaced within a certain period of time or when assets are inherited following someone's death.

Answer 36

Exemptions and reliefs in inheritance tax serve the purpose of reducing or eliminating the charge to inheritance tax. Exemptions completely remove the asset or transfer from the scope of inheritance tax, while reliefs reduce the value of a taxable transfer by the amount attributed to the specific property or asset. Business property relief (BPR) and agricultural property relief (APR) are examples of reliefs that apply in specific circumstances.

Answer 37

Spouse exemption in inheritance tax allows for transfers of assets between spouses or civil partners to be exempt from inheritance tax. This means that when one spouse or civil partner dies and leaves their estate to the surviving spouse or civil partner, no inheritance tax is payable on that transfer. The spouse exemption helps ensure that assets can be passed on to the surviving spouse without incurring a tax burden.

Answer 38

Charity exemption in inheritance tax allows for transfers of assets to qualifying charities to be exempt from inheritance tax. When assets are left to a qualifying charity in a will or through other means, no inheritance tax is payable on that transfer. The charity exemption encourages charitable giving and supports the work of charitable organizations.

Answer 39

Woodlands relief in inheritance tax reduces the inheritance tax payable on the value of qualifying woodlands. It is a relief that applies specifically to woodlands and helps to incentivize the preservation and maintenance of woodland areas. By reducing the tax burden, woodlands relief encourages the protection and conservation of forests and natural habitats.

Answer 40

Quick succession relief in inheritance tax reduces the inheritance tax payable when there are two or more chargeable transfers within a short period of time. It aims to prevent an excessive tax burden when assets are passed down through generations in quick succession. Quick succession relief helps to ensure that families can pass on their wealth without facing a significant tax liability.

Answer 41

Taper relief in inheritance tax reduces the rate of tax payable on gifts made within a certain period before death. The longer the period between the gift and death, the lower the rate of tax. Taper relief aims to incentivize lifetime giving and allows individuals to gradually reduce their potential inheritance tax liability over time.

Answer 42

Political party exemption in inheritance tax allows for transfers of assets to registered political parties to be exempt from inheritance tax. This exemption supports the democratic process and encourages political participation by enabling individuals to make contributions to political parties without incurring an inheritance tax liability.

Answer 43

Exemptions for gifts to housing associations in inheritance tax allow for transfers of assets to registered housing associations to be exempt from inheritance tax. This exemption supports the provision of affordable housing and encourages contributions to housing associations for the benefit of the community.

Answer 44

Exemptions for gifts for national purposes or to heritage maintenance funds in inheritance tax allow for transfers of assets to be exempt from inheritance tax when they are made for national purposes or to heritage maintenance funds. These exemptions support the preservation and maintenance of national heritage sites and cultural assets for the benefit of the public.

Answer 45

There are a number of different exemptions and reliefs that can be used to reduce or eliminate the charge to IHT. Some of these include spouse exemption, charity exemption, business property relief, agricultural property relief, political party exemption, exemptions for gifts for national purposes or to heritage maintenance funds, and exemption for gifts to Employee Benefit Trusts (EBTs).

Answer 46

The spouse exemption enables spouses to make lifetime and testamentary gifts to each other completely free from IHT. It applies equally to married couples and civil partners within a civil partnership. There is no financial limit to the amount of spouse exemption that can be claimed.

Answer 47

The charity exemption means that a person can make lifetime and testamentary gifts to a registered charity completely free from IHT. There is no financial limit to the amount of charity exemption that can be claimed. The gift must be immediate and not in remainder for the exemption to apply.

Answer 48

Other exemptions and reliefs that apply to lifetime transfers and the death estate include business property relief, agricultural property relief, political party exemption, exemptions for gifts for national purposes or to heritage maintenance funds, exemption for gifts to Employee Benefit Trusts (EBTs), and more.

Answer 49

To satisfy the spouse exemption, it does not matter why the spouse inherits. The relief applies to the value of assets received under a will, intestacy, survivorship, or any combination. Unmarried couples cannot claim spouse exemption, and there is no concept of a 'common law' spouse.

Answer 50

The purpose of the spouse exemption is to allow spouses to transfer assets to each other without incurring an inheritance tax liability. This exemption recognizes the importance of spousal relationships and aims to provide financial security for surviving spouses.

Answer 51

A gift between spouses may be conditional, provided the condition is satisfied within 12 months of death. For example, a conditional gift may include a survivorship clause. As long as the condition is met within the specified timeframe, the spouse exemption still applies.

Answer 52

The charity exemption in inheritance tax means that all transfers to registered charities during life and following death are exempt from IHT, irrespective of the amount given, provided the gift is used exclusively for the purposes of the charity. The gift can be conditional, but the condition must be satisfied within 12 months. The gift must normally be absolute and made to a charity subject to the jurisdiction of a UK court or another EU member state.

Answer 53

When making a charitable gift under a will for inheritance tax purposes, it is important to check the recipient's charitable status for IHT purposes. The gift must be made to a charity subject to the jurisdiction of a UK court or another EU member state. It is also worth checking how close the gift comes to 10% of the net estate, as a reduced rate of IHT may be available if at least 10% of the estate is left to charity.

Answer 54

In addition to spouse exemption and charity exemption, there are other exemptions that apply to lifetime transfers and the death estate. These include business property relief, agricultural property relief, political party exemption, exemptions for gifts for national purposes or to heritage maintenance funds, exemption for gifts to Employee Benefit Trusts (EBTs), and more.

Answer 55

The purpose of the charity exemption is to encourage individuals to make charitable gifts by providing a complete exemption from IHT for transfers to registered charities. This exemption recognizes the importance of supporting charitable causes and aims to incentivize philanthropy.

Answer 56

The other exemptions and reliefs in inheritance tax serve various purposes. For example, business property relief encourages the continuity and development of businesses, while agricultural property relief supports the preservation of agricultural land. Political party exemption, exemptions for gifts for national purposes or to heritage maintenance funds, and exemption for gifts to Employee Benefit Trusts (EBTs) have their own specific purposes and criteria.

Answer 57

Woodlands relief is a deferral of tax on the value of woodland until it is sold. It applies to gifts of woodland following death, provided the deceased had owned the woodland for at least 5 years before dying. The relief allows the value of the woodland to be excluded from the death estate, and the tax is deferred until the timber is subsequently sold or given away.

Answer 58

Quick succession relief (QSR) applies when a person dies and their death estate includes assets received by way of gift or inheritance in the 5 years before their death, and those assets were subject to an IHT charge when transferred to the deceased. QSR reduces the IHT payable on the subsequent death estate to the extent it is attributable to assets previously charged to IHT. The relief is calculated based on the amount of IHT paid previously and the time elapsed since the original charge.

Answer 59

The deadline for submitting the IHT 400 form is 12 months from the end of the month of death.

Answer 60

The deadline for paying IHT (or the first installment where the installment option is used) is 6 months from the end of the month of death.

Answer 61

The administration process carried out by PRs can be roughly divided into two stages. The first stage involves steps required from death up to the issue of the grant of representation, including the account and payment of inheritance tax (IHT). The second stage involves steps required from the issue of the grant to the completion of the administration, including IHT payment and account.

Answer 62

The PRs complete the IHT 400 form to report to HMRC about the estate assets and liabilities. This form provides information about the value of the estate and is used to calculate the amount of IHT due.

Answer 63

The deadline for submitting the IHT account is 12 months from the end of the month in which the death occurred. The deadline for paying IHT due is 6 months from the end of the month in which the death occurred, after which interest becomes payable on the unpaid tax.

Answer 64

The instalment option allows the IHT due in respect of certain assets to be paid by 10 equal annual instalments. This option may be used if there are insufficient liquid assets available prior to the grant being issued to pay the full amount due.

Answer 65

The first instalment of IHT is due by the usual deadline, which is six months after the end of the month in which the deceased died.

Answer 66

The IHT 400 form is used to report information about the estate assets and liabilities to HMRC. It is used to calculate the amount of IHT due and is required unless the estate is excepted.

Answer 67

A low value excepted estate is one where there is no IHT payable because the gross value of the estate is below the NRB (current NRB amount and any transferable NRB available from their spouse).

Answer 68

An exempt excepted estate is one where the gross value of the estate is not above £3 million, and after the deduction of liabilities, spouse/civil partner exemption, and/or charity exemption, the net value of the estate is below the NRB (current amount and any transferred).

Answer 69

If any of the following apply, the estate cannot be excepted: the deceased made a gift with reservation of benefit that subsists at death, the estate includes more than one trust interest or a single trust interest worth more than £250,000 (unless passing to a spouse), foreign assets are worth more than £100,000, or the value of specified transfers exceeds £250,000. Additionally, if a claim for the residence NRB is being made, the estate cannot be excepted.

Answer 70

For excepted estates, the PRs are not required to complete an IHT 400 form. Instead, they provide information about the value of the estate as part of the application for the grant of representation. Key information is then sent by the Probate Registry to HMRC.

Answer 71

For those domiciled in the UK, there are two categories of excepted estates: low value excepted estates and exempt excepted estates.

Answer 72

ANSWER Dealing with an excepted estate is simpler and quicker than the IHT 400 form, and there is no need to complete and send any forms to HMRC.

Answer 73

When dealing with an estate, the IHT 400 form is supplemented by additional forms called schedules (IHT401 - IHT 420) which contain detailed information about each of the assets. The specific schedules that need to be completed depend on the assets held by the deceased.

Answer 74

An IHT 421 form, also known as the probate summary, should be completed. It contains details about the deceased and a summary of the gross/net succession estate, which refers to assets passing under the grant rather than the IHT estate.

Answer 75

Loss relief entitles the Personal Representatives (PRs) to claim a partial refund of IHT when losses occur on the sale of certain assets within prescribed time frames. The details of this relief are beyond the scope of this module.

Answer 76

A corrective account, in the form of Form C4, is used to inform HMRC about post-death changes to the estate. It is used to correct inaccurate date of death information provided in the IHT400 form, as well as to report additional assets/liabilities discovered, corrections to the value of assets/liabilities, changes to exemptions/reliefs applied, and variations of original beneficiary entitlements that affect the IHT liability.

Answer 77

If the total value of the taxable estate increases due to new assets discovered, the original value of an asset being too low, or reliefs mistakenly claimed, the Personal Representatives (PRs) should pay the additional IHT due when sending HMRC the corrective account (C4). If the total value of the taxable estate decreases due to new liabilities discovered, the original value of an asset being too high, or reliefs due not being claimed, the PRs can claim a refund of IHT already paid.

Answer 78

Personal Representatives (PRs) have two main options to raise funds for paying IHT: the Direct Payment Scheme and borrowing. Under the Direct Payment Scheme, banks or building societies can be asked to make a direct payment from the deceased's account(s) to HMRC. Borrowing can be done from a beneficiary or a bank, where commercial rates of interest will apply.

Answer 79

Personal Representatives (PRs) must complete schedule IHT 423 when using the Direct Payment Scheme to request a direct payment from the deceased's account(s) to HMRC.

Answer 80

The main beneficiary of the estate will often fund the payment of IHT using funds outside of the succession estate, such as money held in a joint bank account that passed by survivorship or the proceeds of a life policy written in trust.

Answer 81

If Personal Representatives (PRs) discover later on that the date of death information provided in the IHT400 form was inaccurate, and too much or too little IHT has been paid, they must correct it by completing a corrective account form (C4). The C4 form is used to inform HMRC about additional assets/liabilities discovered, corrections to the value of assets/liabilities, changes to exemptions/reliefs applied, and variations of original beneficiary entitlements that affect the IHT liability. PRs will also make an adjustment to the calculation of IHT as the liability has either increased or decreased.

Answer 82

The IHT 400 form is a long form used for reporting inheritance tax. It is supplemented by additional forms called schedules (IHT401 - IHT 420) which contain detailed information about each of the assets. The specific schedules that need to be completed depend on the assets held by the deceased.

Answer 83

The IHT 421 form, also known as the probate summary, should be completed. It contains details about the deceased and a summary of the gross/net succession estate, which refers to assets passing under the grant rather than the IHT estate.

Answer 84

Loss relief entitles the Personal Representatives (PRs) to claim a partial refund of IHT when losses occur on the sale of certain assets within prescribed time frames. If loss relief is claimed, the PRs will make an adjustment to the calculation of IHT as the liability has either increased or decreased.