W3 Flashcards
What is a Potentially Exempt Transfer (PET)?
A Potentially Exempt Transfer (PET) is a lifetime gift to another individual. It is exempt from IHT unless the transferor dies within 7 years, in which case it is charged at the death rate of 40%.
What is a Lifetime Chargeable Transfer (LCT)?
A Lifetime Chargeable Transfer (LCT) is a lifetime gift into a trust. It is an immediately chargeable transfer and is taxed at the lifetime rate of 20%. If the transferor dies within 7 years, it is reassessed and charged at the death rate.
What is the nil rate band in Inheritance Tax?
The nil rate band is the threshold up to which no IHT is payable. Currently, the basic nil rate band is £325,000. There is also an additional nil rate band for individuals who dispose of their family home to direct descendants.
How is the value of chargeable transfers calculated for Inheritance Tax?
The value of chargeable transfers for Inheritance Tax depends on the trigger event. For lifetime transfers, it is assessed by reference to the loss in value to the donor. For the death estate, the value is calculated by reference to the market value of items in the estate on the date of death.
What are the different rates of Inheritance Tax?
The rates of Inheritance Tax are set annually by the budget for the tax year. For the current tax year, the rates are as follows: - Nil rate band: 0% - Lifetime rate: 20% - Death rate: 40%
What are the three kinds of IHT trigger events?
The three kinds of IHT trigger events are: 1) Potentially Exempt Transfers (PET) - lifetime transfers of value that could become chargeable to IHT if the transferor dies within 7 years; 2) Lifetime Chargeable Transfers (LCT) - lifetime transfers of value that are immediately chargeable to IHT; 3) Death - when a person dies, there is a deemed transfer of all the assets they own, which is subject to IHT.
What is the cumulative total in relation to Inheritance Tax?
The cumulative total is the total value of chargeable transfers made in the previous 7 years. It is used to reduce the nil rate band available for the current transfer, ensuring that individuals cannot avoid IHT by making a series of separate dispositions.
What are exemptions and reliefs in Inheritance Tax?
Exemptions and reliefs are provisions that can be used to reduce or eliminate an IHT liability. Exemptions apply to certain gifts or transfers that are completely free from IHT. Reliefs reduce the amount of IHT payable on particular assets. Some exemptions and reliefs apply to both lifetime transfers and the death estate.
How is Inheritance Tax calculated on lifetime transfers?
To calculate the IHT due on a failed PET or LCT, the following formula is used: Step A - Identify value transferred; Step B - Apply exemptions & reliefs; Step C - Identify chargeable value; Step D - Calculate and apply NRB; Step E - Apply rates of tax.
How is Inheritance Tax calculated on the death estate?
To calculate the IHT due when someone dies, a 7-step process is followed: Step 1 - Calculate cumulative total; Step 2 - Identify assets included in the taxable estate; Step 3 - Value the taxable estate; Step 4 - Deduct debts/expenses; Step 5 - Apply exemptions & reliefs; Step 6 - Apply residence nil rate band (RNRB); Step 7 - Apply basic nil rate band and calculate tax.
What is the purpose of cumulation in Inheritance Tax?
Cumulation is used to prevent individuals from reducing their IHT liability by making a series of separate dispositions. It involves considering any other IHT transfers made in the 7 years prior to the current transfer being taxed, which reduces the nil rate band available for the current transfer.
What is the role of HMRC in relation to Inheritance Tax?
HMRC stands for Her Majesty’s Revenue & Customs, which is the UK tax authority. HMRC is responsible for administering and collecting Inheritance Tax.
What is the basic nil rate band in Inheritance Tax?
The basic nil rate band in Inheritance Tax is £325,000. This means that the first £325,000 of a transfer subject to IHT is taxed at 0%.
What is cumulation in relation to inheritance tax?
Cumulation is used to prevent individuals from reducing or avoiding an inheritance tax liability by making a series of separate dispositions. Instead of viewing each chargeable transfer (e.g., failed PET, LCT, death) in isolation, HMRC considers other chargeable transfers made in the 7 years prior to the transfer being taxed. The combined value of these transfers is called the cumulative total, which reduces the available nil rate band for the transfer under consideration.
How is the cumulative total calculated in relation to inheritance tax?
The cumulative total is calculated as the total chargeable value of all the chargeable transfers made in the previous 7 years. It is necessary to calculate the cumulative total on the relevant date to determine the available nil rate band for a particular transfer.
What is the effect of the cumulative total on the available nil rate band?
The effect of the cumulative total is to reduce the available nil rate band for the transfer under consideration. The available nil rate band is calculated by subtracting the cumulative total from the full nil rate band.
Can you provide an example of cumulation in relation to inheritance tax?
For example, if a man made two lifetime gifts within the last seven years, with chargeable values of £50,000 and £100,000 respectively, and both gifts failed, his cumulative total on death would be £150,000. His nil rate band would be reduced accordingly, resulting in an available nil rate band of £175,000.
What is the purpose of the transfer of basic nil rate band (TNRB) in inheritance tax?
Before 9 October 2007, the basic nil rate band would be wasted when a deceased passed their estate entirely to their surviving spouse. To make the most of both nil rate bands, individuals would often leave a portion of their estate to other family members or set up trusts known as nil rate band trusts. However, the introduction of the TNRB in the Finance Act 2008 made this tax planning less common.
How does the transfer of basic nil rate band (TNRB) work in inheritance tax?
If a married individual dies and some or all of their nil rate band remains unused, the personal representatives (PRs) of the surviving spouse can claim an increase in the survivor’s nil rate band equal to the unused percentage of the first spouse’s nil rate band. This is known as the transferable nil rate band (TNRB). The amount of the TNRB is calculated based on the value of the nil rate band on the date the survivor dies.
What happens if the value of the nil rate band changes between the deaths of the two spouses in relation to the transfer of basic nil rate band (TNRB)?
If the value of the nil rate band changes between the date of the first spouse’s death and the second spouse’s death, the amount of the transferable nil rate band (TNRB) is calculated with reference to the higher value of the nil rate band. This benefits the estate of the surviving spouse, as they will benefit from any increase in the nil rate band threshold that occurs after the first death.
Can you provide an example of the transfer of basic nil rate band (TNRB) in inheritance tax?
For example, if the first spouse to die had used 50% of their nil rate band, when the second spouse died, the transferable amount of the nil rate band would be 50%. The specific amount of the TNRB would depend on the value of the nil rate band at the time of the second spouse’s death.
What is the significance of outliving multiple spouses in relation to the transfer of basic nil rate band (TNRB)?
The transfer of basic nil rate band (TNRB) is only available after the surviving spouse dies. It cannot be claimed in respect of a chargeable lifetime transfer made by the survivor. However, individuals who have survived more than one spouse can claim the TNRB in respect of all of them, subject to a cap of 100% of a full nil rate band being transferred.
What is the deadline for making a claim for the transfer of basic nil rate band (TNRB) in inheritance tax?
The personal representatives (PRs) of the surviving spouse must make a claim for the transfer of basic nil rate band (TNRB) in the inheritance tax return within two years of the end of the month of death, or within three months of the PRs first acting if this is later. HMRC has discretion to extend the deadline.
What is the residence nil rate band (RNRB) in inheritance tax?
The residence nil rate band (RNRB) was introduced by the Finance (No 2) Act 2015. It provides an additional nil rate band when certain conditions are met, including the deceased dying on or after 6 April 2017 and their estate including a qualifying residential interest (QRI) that is closely inherited by a direct descendant.
How is the amount of the residence nil rate band (RNRB) determined?
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.
What is a qualifying residential interest (QRI) in relation to the residence nil rate band (RNRB)?
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.
Can you provide an example of the residence nil rate band (RNRB) in inheritance tax?
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.
How does transferring the RNRB work?
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.
What is the maximum RNRB that an estate may qualify for?
Where a full transfer occurs, an estate may qualify for a RNRB of £350,000 (£175,000 + £175,000).
How does the tapered withdrawal of the RNRB work for net estates worth more than £2 million?
The tapered withdrawal of the RNRB for net estates worth more than £2 million applies with reference to the total RNRB.
How is the RNRB reduced for estates worth more than £2.7 million?
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.
Can you provide an example of transferring the RNRB?
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).
What is the downsizing addition in relation to the RNRB?
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.
What are the requirements for an estate to qualify for the downsizing addition?
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.
When should a claim for the downsizing addition be made?
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.
What are the circumstances where the downsizing rules are not relevant?
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.
What is the maximum combined NRB that an estate can qualify for?
It is possible for a person’s estate to qualify for a total NRB amount of £1 million.
Can you provide an example of how the maximum combined NRB can be achieved?
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.
What are the steps involved in calculating inheritance tax on the death estate?
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.
What is the cumulative total in the context of calculating inheritance tax on the death estate?
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.
What assets are included in the taxable estate for inheritance tax purposes?
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.
What is the impact of writing an insurance policy on trust for another person?
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.
Are discretionary lump sum payments from pension schemes included in the taxable estate?
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.
Can contributors to pension schemes indicate who should receive the money after their death?
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.
What assets are included in the taxable estate for inheritance tax purposes?
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.
How is the value of related property determined for inheritance tax purposes?
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.
What discount is applied to the value of a deceased’s share of jointly owned land?
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.
What deductions can be made from the value of the estate for inheritance tax purposes?
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.
What exemptions and reliefs can be applied to reduce the value of the taxable estate?
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.
What is the Residence Nil Rate Band (RNRB) and when is it applicable?
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.
How is the tax due on the taxable estate calculated?
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.
What is the purpose of inheritance tax exemptions and reliefs?
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.
When should exemptions and reliefs be considered in inheritance tax planning?
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.
What are some common exemptions and reliefs in inheritance tax?
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.
What are the different exemptions and reliefs that can be used to reduce or eliminate the charge to inheritance tax?
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.
What is the purpose of business property relief (BPR) in inheritance tax?
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.
What are the requirements for qualifying business assets for business property relief (BPR)?
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.
What is the relationship between agricultural property relief (APR) and business property relief (BPR)?
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.
What are the qualifying requirements for agricultural property relief (APR)?
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.
What is the difference between exemptions and reliefs in inheritance tax?
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.
What is the purpose of spouse exemption in inheritance tax?
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.
What is the purpose of charity exemption in inheritance tax?
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.
What is the purpose of woodlands relief in inheritance tax?
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.
What is the purpose of quick succession relief in inheritance tax?
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.
What is the purpose of taper relief in inheritance tax?
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.
What is the purpose of political party exemption in inheritance tax?
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.
What is the purpose of exemptions for gifts to housing associations in inheritance tax?
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.
What is the purpose of exemptions for gifts for national purposes or to heritage maintenance funds in inheritance tax?
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.
What are the exemptions and reliefs that can be used to reduce or eliminate the charge to inheritance tax (IHT)?
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).
What is the spouse exemption in relation to inheritance tax?
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.
What is the charity exemption in relation to inheritance tax?
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.
What are some other exemptions and reliefs that apply to lifetime transfers and the death estate?
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.
What are the requirements to satisfy the spouse exemption in inheritance tax?
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.
What is the purpose of the spouse exemption in inheritance tax?
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.
How does the spouse exemption work in the case of conditional gifts?
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.
What is the charity exemption in inheritance tax and what are the requirements to qualify for it?
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.
What should be considered when making a charitable gift under a will for inheritance tax purposes?
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.
What are some other exemptions that apply to lifetime transfers and the death estate?
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.
What is the purpose of the charity exemption in inheritance tax?
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.
What is the purpose of the other exemptions and reliefs in inheritance tax?
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.
What is woodlands relief in inheritance tax and when does it apply?
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.
What is quick succession relief in inheritance tax and when does it apply?
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.
What is the deadline for submitting the IHT 400 form?
The deadline for submitting the IHT 400 form is 12 months from the end of the month of death.
When is the deadline for paying IHT?
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.
What are the steps involved in the administration process of an estate?
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.
What is the purpose of completing the IHT 400 form?
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.
What are the deadlines for submitting the IHT account and paying IHT?
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.
What is the purpose of the instalment option for paying IHT?
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.
When is the first instalment of IHT due under the instalment option?
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.
What is the IHT 400 form used for?
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.
What are the criteria for an estate to be considered a low value excepted estate?
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).
What are the criteria for an estate to be considered an exempt excepted estate?
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).
What factors prevent an estate from being excepted?
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.
What is the purpose of the IHT 400 form for excepted estates?
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.
What are the categories of excepted estates for those domiciled in the UK?
For those domiciled in the UK, there are two categories of excepted estates: low value excepted estates and exempt excepted estates.
What is an advantage of dealing with an excepted estate?
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.
What are the schedules that may need to be completed when dealing with an estate?
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.
What is the purpose of completing an IHT 421 form?
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.
What is loss relief in the context of inheritance tax?
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.
What is a corrective account and when is it used?
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.
What happens if the total value of the taxable estate increases or decreases after the submission of the IHT400 form?
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.
How can Personal Representatives (PRs) raise funds to pay the Inheritance Tax (IHT)?
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.
What is the purpose of completing schedule IHT 423?
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.
How do Personal Representatives (PRs) typically fund the payment of Inheritance Tax (IHT)?
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.
What should Personal Representatives (PRs) do if they discover post-death changes to the estate that affect the Inheritance Tax (IHT) liability?
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.
What is the purpose of the IHT 400 form?
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.
What is the purpose of the IHT 421 form?
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.
What is loss relief and how does it affect the calculation of Inheritance Tax (IHT)?
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.
