WAE 5 - Inheritance Tax Flashcards
What governs Inheritance Tax (IHT)?
The Inheritance Tax Act 1984.
What is the Nil Rate Band (NRB)?
The first £325,000 of an estate is taxed at 0% IHT.
Can unused NRB be transferred?
Yes, it is transferable to a spouse/civil partner (TNRB), up to 100% of a full NRB.
What is the RNRB?
An additional £175,000 allowance for individuals leaving their home to direct descendants.
Can the RNRB be transferred?
Yes, unused RNRB can be transferred to a spouse/civil partner.
What is the estate value threshold for RNRB tapering?
If the estate exceeds £2 million, RNRB is reduced by £1 for every £2 over this limit.
What are the IHT rates?
- Lifetime rate: 20% (on chargeable lifetime transfers)
- Death rate: 40% (on the taxable estate)
What is the maximum combined NRB and RNRB?
£1 million (if both are fully used and transferred).
What are the three main IHT trigger events?
- Potentially Exempt Transfers (PETs) – Gifts that are exempt if the donor survives 7 years.
- Lifetime Chargeable Transfers (LCTs) – Transfers into trusts, taxed immediately at 20% if exceeding the NRB.
- Death – A deemed transfer of all assets at 40% IHT, including PETs and LCTs from the last 7 years.
How is IHT calculated for lifetime transfers?
- Calculate cumulative total – Add up chargeable transfers from the past 7 years.
- Identify value transferred – Calculate loss to donor’s estate.
- Apply exemptions/reliefs – Apply Annual Exemption (£3,000), spouse exemption, BPR/APR.
- Apply NRB and calculate tax – Tax any excess at 20% (LCTs) or 40% (failed PETs).
- Apply taper relief – Reduces tax if the donor survived 3-7 years after the gift.
How does taper relief reduce IHT on lifetime transfers?
If the donor survives 3-7 years, the tax payable is reduced:
* 0-3 years: No reduction
* 3-4 years: 20% relief
* 4-5 years: 40% relief
* 5-6 years: 60% relief
* 6-7 years: 80% relief
How is IHT calculated on the death estate?
- Calculate cumulative total – Add chargeable transfers from 7 years before death.
- Identify taxable death estate – Includes all assets owned by the deceased.
- Value the estate – Based on market value at death.
- Deduct debts/liabilities – Deduct any valid debts, funeral costs.
- Apply exemptions/reliefs – Spouse exemption, charity exemption, BPR, APR.
- Apply RNRB (if applicable) – Reduce estate value if a qualifying residence is inherited.
- Apply NRB and calculate tax – Apply 40% IHT on any value above NRB.
Who is responsible for paying IHT on lifetime transfers?
- PETs: Donee (recipient) is liable if the donor dies within 7 years.
- LCTs: Trustees are liable for tax on trust transfers.
- If unpaid within 12 months, the deceased’s PRs become liable.
Who pays IHT on the death estate?
The Personal Representatives (PRs) using the residuary estate, unless the will states otherwise.
What are the key IHT exemptions for lifetime transfers?
- Annual Exemption (AE): £3,000 per tax year (can carry forward one unused year).
- Spouse Exemption: 100% relief for gifts to a UK-domiciled spouse/civil partner.
- Small Gifts Allowance: Gifts up to £250 per recipient, unlimited recipients.
- Marriage Exemption: Up to £5,000 (parent to child), £2,500 (grandparent to grandchild), £1,000 (others).
- Normal Expenditure Out of Income: Regular gifts from excess income are fully exempt.
What IHT exemptions apply at death?
- Spouse Exemption: 100% relief for gifts to UK-domiciled spouse/civil partner.
- Charity Exemption: Gifts to UK/EU charities are fully exempt.
- Business Property Relief (BPR): 100% or 50% relief on qualifying business assets.
- Agricultural Property Relief (APR): 100% or 50% relief for agricultural land/buildings.
What qualifies for 100% BPR?
- Unquoted shares
- Sole tradership/partnership interests
What qualifies for 50% BPR?
- Quoted shares
- Business assets
What is the ownership requirement for BPR?
The donor must have owned the business for 2+ years before the transfer.
What qualifies for 100% APR?
- Farmland, buildings, and cottages used for agriculture.
- Must have been occupied for 2 years before the transfer (owner-occupiers).
What qualifies for 50% APR?
- Land let on old agricultural tenancy agreements.
What is Quick Succession Relief (QSR)?
- Reduces IHT if assets are taxed twice within 5 years.
- IHT paid on previous inheritance is credited against the new tax.
What are the relief rates for QSR?
- 100% relief if death occurs within 1 year
- Reduces to 20% if 4-5 years have passed.
Does revoking a will affect IHT liability?
No, IHT is calculated regardless of whether a will exists.
How does divorce affect IHT?
Gifts to a former spouse are no longer exempt.
