W7

Question 1

What is taper relief and how does it affect the tax payable on lifetime transfers?

Answer 1

Taper relief is a mechanism that reduces the amount of tax payable following death in respect of a lifetime transfer that is chargeable (re-assessed LCT and failed PET) if the transferor survives 3-7 years. It helps to lower the tax liability.

Question 2

What are the separate IHT calculations required when a person dies?

Answer 2

When a person dies, there may be separate IHT calculations that are required. These include the tax due as a result of the transferor dying within seven years of making a lifetime transfer (LCTs and failed PETs), and the tax due as a result of the deemed transfer of the death estate. The total IHT payable is the sum of these calculations.

Question 3

What are some common anti-avoidance rules in relation to inheritance tax (IHT)?

Answer 3

Some common anti-avoidance rules in relation to IHT include the restriction on deduction of loans for IHT purposes, gifts with reservation of benefit (GROB) rules, pre-owned assets charge (POAC), general anti-abuse rule (GAAR), and disclosure of Tax Avoidance Schemes (DOTAs). These rules aim to prevent aggressive tax avoidance.

Question 4

What is the difference between tax avoidance and tax evasion?

Answer 4

Tax avoidance refers to the lawful arrangement of a client’s affairs to minimize their tax liability, while tax evasion involves withholding information or taking steps to avoid paying the tax one is liable for. Tax avoidance is legal, while tax evasion is unlawful.

Question 5

What is the Ramsay Principle and how does it relate to statutory interpretation?

Answer 5

The Ramsay Principle is a method of statutory construction that involves looking at the purpose behind the legislation and applying the tax rules based on the underlying substance of the transaction rather than its form. It is similar to the mischief rule of statutory interpretation.

Question 6

What is the purpose of the general anti-abuse rule (GAAR) in relation to tax avoidance?

Answer 6

The general anti-abuse rule (GAAR) is an extremely wide measure that penalizes aggressive tax avoidance. It aims to counteract arrangements that are deemed to be abusive and not in line with the intention of the tax legislation.

Question 7

What are the anti-avoidance rules related to deductions in the context of loans?

Answer 7

Anti-avoidance rules restrict deductions for loans made to acquire, maintain, or enhance assets that qualify for Business Property Relief (BPR), agricultural and woodlands relief, loans that are not repaid from the estate, loans made to acquire, maintain, or enhance excluded property, and loans that fund a qualifying foreign currency account.

Question 8

How are loans made for assets attracting BPR treated in terms of deductions?

Answer 8

If a loan was made to acquire, maintain, or enhance assets that qualify for BPR (or agricultural/woodlands relief), the costs of the loan must first be set against the value of the qualifying assets. This reduces the value of assets that attract relief. If the loan exceeds the value of the relievable assets, the remainder can be deducted from the value of the chargeable estate.

Question 9

What is the effect of reserving a benefit in the context of gifts with reservation of benefit (GROB)?

Answer 9

f the GROB subsists at the date of the donor’s death, the property is treated as if it were part of the donor’s estate for inheritance tax purposes. It is valued at the date of the donor’s death. If the donor no longer retains the benefit at the date of their death, they are treated as having made a potentially exempt transfer (PET) on the date the reservation ceased. This deemed PET is charged in the same way as any other PET on the donor’s death, but it will not benefit from the Annual Exemption (AE).

Question 10

When do the gifts with reservation of benefit (GROB) rules apply?

Answer 10

The GROB rules apply when a lifetime gift is made and either the donee does not assume bona fide possession of the property at or before the start of the relevant period, or at any time during the relevant period, the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor and any benefit to them by contract or otherwise. The relevant period is the seven-year period before the donor’s death.

Question 11

What is the effect of a reserving a benefit in terms of the pre-owned assets charge (POAC)?

Answer 11

The effect of reserving a benefit depends on how long the benefit is reserved. If the GROB subsists at the date of the donor’s death, the property is treated as part of the donor’s estate for inheritance tax purposes and is valued at the date of the donor’s death. If the donor no longer retains the benefit at the date of their death, they are treated as having made a potentially exempt transfer (PET) on the date the reservation ceased. This deemed PET is charged in the same way as any other PET on the donor’s death, but it will not benefit from the Annual Exemption (AE).

Question 12

What are the income tax and capital gains tax consequences of naming the settlor as a beneficiary of a discretionary trust?

Answer 12

Naming the settlor (or their spouse or unmarried minor children) as beneficiaries of a discretionary trust has income tax and capital gains tax consequences.

Question 13

What is the purpose of the pre-owned assets charge (POAC)?

Answer 13

The purpose of the pre-owned assets charge (POAC) is to prevent individuals from exploiting loopholes in the gifts with reservation of benefit (GROB) rules. It ensures that property given away during an individual’s lifetime but with a retained benefit is taxed upon their death, unlike genuine gifts which may only be taxed as failed potentially exempt transfers (PETs) if the donor dies within 7 years of making the gift.

Question 14

What types of property does the pre-owned assets charge (POAC) apply to?

Answer 14

The pre-owned assets charge (POAC) applies to certain types of property that are given away during an individual’s lifetime but subsequently provide a benefit to the donor. It does not apply to property that remains within the individual’s estate for inheritance tax purposes.

Question 15

Can property be taxed under both the gifts with reservation of benefit (GROB) rules and the pre-owned assets charge (POAC)?

Answer 15

No, property cannot be taxed under both the gifts with reservation of benefit (GROB) rules and the pre-owned assets charge (POAC). If property is subject to the GROB rules, it will not be subject to the POAC. However, it is possible to make an election for property to be taxed as a GROB instead of a POAC.

Question 16

What are the consequences of reserving a benefit in terms of capital gains tax (CGT)?

Answer 16

When a donor makes a gift with a reservation of benefit (GROB), the property becomes the donee’s property for the purposes of capital gains tax (CGT). This means that CGT may be payable by the donor on the increase in value of the property since they acquired it. If the donee later sells the property, CGT will be calculated based on the increase in the value of the property between the date of the gift and the date of transfer.

Question 17

What is the free CGT uplift and why is it significant?

Answer 17

The free CGT uplift refers to the treatment of property acquired upon the donor’s death for capital gains tax (CGT) purposes. When property is inherited at the date of death, there is no CGT liability in relation to gains accrued during the deceased’s lifetime for the donor’s estate. The donee is treated as acquiring the property for its market value at the date of death. This can be a significant justification for leaving it until death to make a gift of valuable property.

Question 18

What is the purpose of the pre-owned assets charge (POAC) and when was it introduced?

Answer 18

The pre-owned assets charge (POAC) was introduced in the Finance Act 2004 (FA 2004). Its purpose is to impose an annual income tax charge on individuals who give away certain types of property during their lifetime but subsequently obtain a benefit from that property. The POAC prevents individuals from exploiting loopholes in the gifts with reservation of benefit (GROB) rules.

Question 19

What is the relevant period for determining if a gift is caught by the gifts with reservation of benefit (GROB) rules?

Answer 19

The relevant period for determining if a gift is caught by the gifts with reservation of benefit (GROB) rules is the seven-year period before the donor’s death. It is not simply the seven years after the gift is made. A gift can be caught by the GROB rules many years after it is made if the donor reacquires an interest in the property.

Question 20

What are the requirements for a donee to be treated as having bona fide possession of gifted property in the context of gifts with reservation of benefit (GROB)?

Answer 20

For a donee to be treated as having bona fide possession of the gifted property in the context of gifts with reservation of benefit (GROB), they must obtain a vested, beneficial interest in the property, have actual enjoyment of the property, and assume possession and enjoyment at the start of the relevant period. Actual enjoyment of the property may consist of physical enjoyment (e.g., occupation of land) or receipt of the income produced by the property.

Question 21

What does the POAC apply to?

Answer 21

The POAC applies to three different types of property: land, chattels, and intangible property held in a settlor-interested trust.

Question 22

What is the difference between land and chattels in relation to the POAC?

Answer 22

For land to be subject to the POAC, two conditions must be satisfied: an individual occupies the land and either the disposal condition or contribution condition is met. For chattels, the occupation condition requires that the individual is in possession of or has the use of the property.

Question 23

What happens if the POAC applies to land or chattels?

Answer 23

If the POAC applies to land, the benefit that the individual receives through their occupation is treated as income, and they will pay income tax on the equivalent of the market rent they would have had to pay. If the POAC applies to chattels, income tax will be calculated by taking the market value of the chattel and multiplying it by an official rate of interest.

Question 24

What are the conditions for the POAC to apply to settlor-interested trusts?

Answer 24

For the POAC to apply to settlor-interested trusts, two conditions must be satisfied: the trust must be settlor-interested, meaning there are circumstances in which the trust property is, will, or may become payable to or for the benefit of the settlor, and the trust property must include intangible property settled into the trust by the individual on its creation or subsequently added by them to the settlement.

Question 25

What are excluded transactions under the POAC?

Answer 25

Excluded transactions under the POAC include transfers to the individual’s spouse or civil partner, dispositions for family maintenance, annual and small gift exemptions, arm’s length sales, and occupation seven years after a cash gift. There is also a general anti-abuse rule (GAAR) that aims to counteract aggressive tax avoidance.

Question 26

What is the purpose of the GAAR and when does it apply?

Answer 26

The GAAR is intended to counteract aggressive tax avoidance. It applies to arrangements that give rise to a tax advantage, where the main purpose of the arrangement is to obtain the tax advantage, and where the arrangement is considered abusive. The GAAR requires taxpayers to make just and reasonable adjustments to counteract the abusive effect of the arrangements.

Question 27

What is the purpose of DOTAS and who does it apply to?

Answer 27

DOTAS (Disclosure of Tax Avoidance Scheme) is a reporting regime that makes HMRC aware of potentially unacceptable tax avoidance arrangements. It applies to promoters of arrangements and parties to notifiable arrangements or proposals. Promoters and parties are required to provide information to HMRC about the arrangements.

Question 28

What are the conditions for an arrangement to be notifiable under DOTAS for IHT?

Answer 28

Arrangements in respect of IHT are notifiable if they fall within any description prescribed by HM Treasury, enable a person to obtain an advantage for IHT, or have the main purpose of enabling a person to obtain specific advantages in respect of IHT. The specific advantages include the avoidance or reduction of specified IHT charges relating to trusts and gifts to close companies, and the avoidance or reduction of charges arising under the GROB rules.

Question 29

What are the requirements for the IHT hallmark under DOTAS to apply?

Answer 29

For the IHT hallmark under DOTAS to apply, the main purpose or one of the main purposes of the arrangements must be to enable a person to obtain specific advantages in respect of IHT. The specific advantages include the avoidance or reduction of specified IHT charges relating to trusts and gifts to close companies, and the avoidance or reduction of charges arising under the GROB rules.

Question 30

What is the general anti-abuse rule (GAAR) and when does it apply?

Answer 30

The GAAR is a rule enacted in Finance Act 2013 to counteract aggressive tax avoidance. It applies to arrangements that give rise to a tax advantage, where the main purpose of the arrangement is to obtain the tax advantage, and where the arrangement is considered abusive. Taxpayers must make just and reasonable adjustments to counteract the abusive effect of the arrangements.

Question 31

What are some items that are excluded from the tax estate?

Answer 31

Items excluded from the tax estate include life policies transferred to a third party, discretionary lump sum post-death pensions (if paid like this), excluded property (remainder interest), and all gifts to a spouse or charity, which are exempt from inheritance tax (IHT).

Question 32

How does the reduced rate of IHT apply when a testator gives away 10% or more of their estate to charity?

Answer 32

If a testator gives away 10% or more of their estate to charity, the chargeable part of the estate qualifies for a reduced rate of IHT at 36% instead of the standard rate of 40%.

Question 33

What is the benefit of making a gift to a charity in terms of IHT?

Answer 33

Making a gift to a qualifying charity by will is tax efficient as these gifts are fully exempt from IHT. Additionally, if a testator leaves 10% or more of their net estate to charity, the chargeable part of the estate qualifies for a reduced rate of IHT at 36% instead of the standard rate of 40%.

Question 34

What are some ways a client can benefit a charity through their will?

Answer 34

A client can benefit a charity through their will by setting up a trust where a charity is included among the beneficiaries. This allows the client to make tax-free gifts to otherwise taxable beneficiaries.

Question 35

What happens if a specific gift of qualifying assets is made to an exempt beneficiary?

Answer 35

If a specific gift of qualifying assets is made to an exempt beneficiary, APR and BPR will be wasted. Both spouse exemption and BPR would apply in relation to the same gift, resulting in the loss of an opportunity for the testator to make more tax-free gifts to non-exempt beneficiaries.

Question 36

How does the gift of qualifying assets in the residuary estate affect APR and BPR?

Answer 36

If qualifying assets are not specifically given away and instead fall into the residuary estate, APR and BPR do not attach to the assets. Instead, the benefit of the relief is apportioned generally between taxable and non-taxable beneficiaries.

Question 37

What are the potential scenarios where spouse exemption may not apply?

Answer 37

Spouse exemption may not apply if the deceased’s estate is not taxable, if the value of the assets is less than the nil rate band, or if the testator is not married at the time of their death.

Question 38

What is the purpose of grossing-up in inheritance tax planning?

Answer 38

Grossing-up is used in inheritance tax planning to calculate the true value of a specific gift to a non-exempt beneficiary. It ensures that the amount of inheritance tax due is paid from other funds and not deducted from the legacy amount.

Question 39

How can the nil rate band be used to minimize inheritance tax liability?

Answer 39

The nil rate band can be used to minimize inheritance tax liability by making gifts to non-exempt beneficiaries up to the value of the nil rate band. This reduces the taxable value of the estate and can result in no inheritance tax being payable.

Question 40

What is the significance of drafting a will with a formula clause for the gift of the nil rate band?

Answer 40

Drafting a will with a formula clause for the gift of the nil rate band ensures clarity in the value of the gift and whether it includes any transferred or residence nil rate band. This is important for maximizing the use of exemptions and reliefs in inheritance tax planning.

Question 41

What happens if the first spouse to die does not use their NRB?

Answer 41

If the first spouse to die does not use their NRB, the survivor is entitled to a full NRB for both themselves and their deceased spouse. This ensures that no NRB is wasted.

Question 42

Under what circumstances might a client choose not to use their NRB?

Answer 42

A client may choose not to use their NRB if they intend to benefit someone other than a spouse, do not want their surviving spouse to control all the family assets, want to reduce the value of assets within the remit of local authority assessment for care home costs, or if the value of their combined estates will be more than 2 million, thus limiting the application of the residence NRB on the survivor’s death.

Question 43

What is the advantage of using a formula clause when gifting the NRB?

Answer 43

Using a formula clause is preferred when gifting the NRB because it allows for flexibility in case the amount of the NRB changes over time. It ensures that the gift can make full use of the tax-free amount available at the time of the testator’s death.

Question 44

What are the advantages and disadvantages of using a discretionary trust in IHT planning?

Answer 44

A discretionary trust offers the advantage of flexibility regarding the future needs of the beneficiaries and a longer-term tax advantage compared to a direct inheritance. However, no spouse exemption can apply on a gift to the trust, and the residence NRB cannot be claimed if the residential interest passes to a discretionary trust.

Question 45

What are the advantages and disadvantages of using a life interest trust in IHT planning?

Answer 45

A life interest trust creates fixed interests in the trust fund, allowing the surviving spouse to benefit from the assets while retaining control over the destination of the estate. However, no spouse exemption can apply on a gift to the trust, and specific drafting is required to ensure access to trust capital if needed by the life tenant.

Question 46

What is a two-year discretionary will trust and what is its purpose?

Answer 46

A two-year discretionary will trust is a trust that is intended to last for a period of two years following a testator’s death. The purpose of this trust is to provide flexibility to the testator, allowing the trustees to make appropriate decisions regarding the distribution of the estate after the testator’s death.

Question 47

What is the advantage of creating a life interest will trust compared to an outright gift?What is the advantage of creating a life interest will trust compared to an outright gift?

Answer 47

Creating a life interest will trust allows the testator to control the ultimate destination of their estate while benefiting from tax advantages. The testator can claim spouse exemption on the amount passing to the trust if their spouse is the life tenant. This provides a tax advantage compared to making an outright gift to a non-exempt beneficiary.

Question 48

What should a solicitor do if they suspect that the instructions for a will do not represent the client’s wishes?

Answer 48

If a solicitor has reason to suspect that the instructions for a will do not represent the client’s wishes, they should not act unless they have satisfied themselves that the instructions are accurate.

Question 49

Who should a solicitor take instructions for a will from?

Answer 49

A solicitor should take instructions for a will from their client only and should not take instructions from anyone else, unless a third party is authorized by the client to provide instructions.

Question 50

What risk should a solicitor be aware of when meeting a couple or members of the same family together?

Answer 50

A solicitor should be aware of the risk of someone giving instructions on behalf of another when meeting a couple or members of the same family together.

Question 51

What should a solicitor be alert to when taking instructions for a will?

Answer 51

A solicitor should be alert to the risk of undue influence when taking instructions for a will. A will made under undue influence or as a result of fraud will not be valid.

Question 52

What should a solicitor do to ensure they provide a competent service to clients?

Answer 52

A solicitor should ensure that the service they provide to clients is competent and delivered in a timely manner. They should also maintain their competence to carry out their role and keep their professional knowledge and skills up to date.

Question 53

What should a solicitor be competent to advise on when preparing a will for a client?

Answer 53

When preparing a will for a client, a solicitor must be competent to advise on all aspects of the retainer, including any tax and trust implications

Question 54

What is the risk of delaying the drafting of a will?

Answer 54

Delaying the drafting of a will gives rise to the risk that the testator dies intestate or with an earlier valid will that does not reflect their current wishes.

Question 55

What should a solicitor consider when taking instructions for a will?

Answer 55

When taking instructions for a will, a solicitor should consider and take account of the client’s attributes, needs, and circumstances. They should also be alert to any indication that their client may lack testamentary capacity.

Question 56

What should a solicitor do if there is doubt about a client’s testamentary capacity?

Answer 56

If there is doubt about a client’s testamentary capacity, a solicitor should obtain the testator’s consent to approach their medical practitioner for confirmation of capacity and make a record of the findings. If testamentary capacity cannot be confirmed, a will should not be prepared.

Question 57

What should a solicitor do to ensure a will is valid and to protect against future challenges?

Answer 57

A solicitor should satisfy themselves that the client has testamentary capacity when taking instructions for a will. If there are concerns, the solicitor should obtain the testator’s consent to approach their medical practitioner for confirmation of capacity and make a record of the findings. A detailed file note of the client’s instructions and an express statement regarding the solicitor’s assessment of the client’s testamentary capacity should be kept.

Question 58

What is the risk of a solicitor accepting a significant gift from a client in their will?

Answer 58

There is a risk of a conflict of interest if a solicitor accepts a significant gift from a client in their will. It is recommended that the solicitor should refuse to act for a client in such a situation unless the client takes independent legal advice.

Question 59

What is the purpose of paying market rent after gifting a house?

Answer 59

Paying market rent after gifting a house ensures that the house ceases to be part of the donor’s estate for inheritance tax purposes.

Question 60

What happens if the donor lives in the property rent-free but moves out before they die?

Answer 60

If the donor lives in the property rent-free but moves out and ceases to derive benefit from the property before they die, there will be no gift with reservation of benefit (GROB). However, there would still be a potentially exempt transfer (PET) on the date the donor moves out, and to avoid inheritance tax consequences, the donor must survive for seven years from moving out.

Question 61

What are the requirements for satisfying the test in Banks v Goodfellow for testamentary capacity?

Answer 61

To satisfy the test in Banks v Goodfellow for testamentary capacity, a testator must understand the nature of the will and its effect, appreciate the extent of their property (which does not require an exact recollection of every item), and be aware of any moral claims upon them. It is likely that the client satisfies the test in Banks v Goodfellow and a will can be prepared following their instructions.

Question 62

What is the legal requirement for knowledge and approval to make a will?

Answer 62

When a person signs a will, there is a presumption of knowledge and approval because the will has been drafted in accordance with their instructions. However, there is no presumption of knowledge and approval in the absence of testamentary capacity.

Question 63

What should be done to ensure knowledge and approval of a will?

Answer 63

The will should be read over to the person, and their express approval to the contents of the will must be given. The attestation clause should include wording to reflect that this took place.