WAE WK3 Flashcards
What is Inheritance Tax (IHT)
A tax levied on the estate of a deceased person. It applies to the UK assets of UK resident taxpayers and worldwide assets of UK-domiciled taxpayers.
What is a chargeable transfer?
Any transfer of value that is not classified as an exempt transfer.
Define “transfer of value.
A disposition made by a person during their lifetime that reduces the value of their estate, such as making a gift or selling an asset for less than its market value.
What is the basic Nil Rate Band (NRB) for IHT?
£325,000. This means that transfers of up to this amount are taxed at 0%.
What is the Transferable Nil Rate Band (TNRB)?
The unused portion of a deceased spouse’s NRB that can be inherited by their surviving spouse, allowing couples to benefit from a combined NRB.
What is the Residence Nil Rate Band (RNRB)?
An additional nil rate band of £175,000 available to those leaving their family home to direct descendants, which can also be transferred to a surviving spouse.
What is the maximum combined NRB a couple can utilize?
£1 million (combining both spouses’ NRBs and RNRBs).
What is the concept of “cumulation” in IHT calculations?
HMRC calculates a cumulative total of chargeable transfers made in the 7 years prior to death, which is then used to reduce the available NRB.
What are the “downsizing rules” in the context of IHT?
Rules that allow an estate to potentially qualify for a RNRB even if the deceased person downsized or gave away their qualifying residence interest (QRI), provided certain conditions are met.
List five assets eligible for payment of IHT in installments.
(1) Land and buildings.
(2) Company shares/securities that grant the deceased control of the company.
(3) Unquoted company shares/securities (without control) if certain conditions are met.
(4) Farms or interests in farming businesses.
(5) Timber.
What is the time limit for paying IHT?
Within 6 months of death.
When does the installment option for paying IHT on a property cease?
If the property is sold before all installments are paid, the option ceases, and the outstanding IHT becomes immediately payable.
When must PRs submit the IHT Account (Form IHT 400)?
Within 12 months of death, unless the estate is classified as “excepted.”
What are the two categories of “excepted estates” relating to IHT?
(1) Low Value Excepted Estates: Value falls below the NRB (£325,000).
(2) Exempt Excepted Estates: Value up to £3 million, with no IHT payable due to spouse or charity exemptions.
Which form is used to correct inaccuracies in the IHT400?
Form C4.
What is the Direct Payment Scheme for IHT?
A scheme where banks release funds directly to HMRC for IHT payment, allowing PRs to settle IHT liabilities before obtaining a grant of representation.
What is a Potentially Exempt Transfer (PET)?
A lifetime gift that may become chargeable to IHT if the donor dies within 7 years of making the gift.
What is a Lifetime Chargeable Transfer (LCT)?
A transfer of value made during a person’s lifetime that is immediately subject to IHT.
Describe the main steps involved in calculating the IHT on a death estate.
(1) Calculate the cumulative total of chargeable transfers from the previous 7 years.
(2) Identify the assets in the taxable estate.
(3) Value the taxable estate.
(4) Deduct debts (including funeral expenses).
(5) Apply available exemptions and reliefs.
(6) Apply a 0% rate for any applicable RNRB.
(7) Apply the basic NRB and calculate the remaining tax at 40%.
When calculating the value of a jointly owned property in a taxable estate, how is the deceased’s share determined?
Divide the total property value by the number of joint owners. For example, if a house is jointly owned by two people and worth £500,000, the deceased’s share is £250,000.
When calculating the value of a property held as tenants in common in a taxable estate, what deduction is applied?
A 10% deduction is applied to the deceased’s share. For example, if a cottage is owned as tenants in common and the deceased’s share is £200,000, the value included in the taxable estate is £180,000.
Is a discretionary pension lump sum, written on trust for a beneficiary, included in the taxable estate?
No, it is not part of the deceased’s estate and is not subject to IHT.
When is a PET made within 7 years of death added back into the taxable estate?
A PET, after deducting any available annual exemptions, is added back to the taxable estate if the transferor dies within 7 years of making the gift.
What is the difference between an IHT exemption and an IHT relief?
Exemptions mean that certain gifts are entirely exempt from IHT and do not affect the NRB. Reliefs mean that specific gifts may qualify for a reduction in the IHT payable, sometimes reducing the IHT liability to 0.
What is the Spouse/Civil Partner Exemption for IHT?
Transfers of value between spouses or civil partners are exempt from IHT during their lifetime and upon death.
What is the Charity Exemption for IHT?
Gifts to registered charities are exempt from IHT.
What is Business Property Relief (BPR)?
An IHT relief that can reduce the taxable value of qualifying business property, including unquoted shares, some quoted shares, and business interests.
What are the rates of relief for BPR?
100% relief for qualifying unquoted shares, partnership interests, and sole trader businesses. 50% relief for certain quoted shares and assets used for business.
What is the minimum ownership period for BPR to apply?
2 years prior to the transfer.
What is Agricultural Property Relief (APR)?
An IHT relief that can reduce the taxable value of agricultural property, such as farmland or farm buildings. It requires the property to be occupied for agricultural purposes for at least 2 years prior to transfer.
What are the rates of relief for APR?
100% relief for agricultural land and 50% relief for certain farm buildings and cottages.
Which IHT relief takes priority when both APR and BPR apply to the same asset?
APR takes priority over BPR.
What is Woodlands Relief?
An IHT relief that allows for the deferral of IHT on the value of woodland gifts made after death.
What are the ownership requirements for Woodlands Relief?
If purchased by the deceased, the woodland must have been owned for at least 5 years prior to death. No qualifying period applies for inherited woodland.
What is Quick Succession Relief?
An IHT relief that reduces IHT payable on assets that were previously charged to IHT on a transfer within the preceding 2-7 years.
What are the rates of relief for Quick Succession Relief?
Relief ranges from 20% to 100%, depending on the time elapsed between transfers.
What is the form used for a direct payment of IHT from a bank account?
IHT423
How is the IHT400 submitted to HMRC?
PRs must report the estate’s assets and liabilities to HMRC by completing and submitting Form IHT 400, unless the estate is classified as “excepted.”
What information is required in a C4 corrective account?
(1) Additional assets/liabilities discovered after IHT 400 submission. (2) Corrections to previously included asset/liability values. (3) Changes to claimed exemptions/reliefs. (4) Variations in beneficiary entitlements affecting IHT liability.
List five methods that PRs can use to raise funds to pay the IHT due on an estate.
(1) Direct Payment Scheme: Banks release funds directly to HMRC.
(2) Borrowing from beneficiaries: Beneficiaries may provide loans to cover IHT.
(3) Borrowing from commercial lenders: PRs may secure loans from banks.
(4) Life insurance: If the deceased had a life insurance policy payable to the estate, the proceeds can be used.
(5) Sale of assets: PRs may sell estate assets to generate cash for IHT payment
What is the main purpose of the Inheritance Tax Act 1984 (IHTA)?
To prevent the reduction of an individual’s estate value during their lifetime to avoid IHT.
When is the reduced IHT rate of 36% applied to an estate?
If at least 10% of the estate is left to charity, a reduced IHT rate of 36% (instead of 40%) may apply to chargeable assets.
What is the qualifying period for APR relief on inherited agricultural property?
No qualifying period is required for inherited agricultural property.
Besides Woodlands Relief, what other reliefs might apply to woodland?
Business Property Relief (BPR) and Agricultural Property Relief (APR).
Are PRs typically required to pay IHT liabilities upon submitting the IHT400?
Yes, PRs are usually required to pay tax liabilities upon submitting the IHT400, regardless of whether the 6-month deadline has passed.
What is the time limit for submitting a corrective account (Form C4) to HMRC?
There is no specific deadline for submitting a C4 form. However, it should be filed promptly upon discovering any errors or omissions in the original IHT400.
When are PRs required to pay IHT on assets subject to the installment option?
The first payment is due by the 6-month deadline, with interest accruing on the remaining unpaid amounts. Subsequent installments are paid annually over a period of up to 10 years.
Which entity issues grants of representation?
The Probate Registry.
List the three main types of grants of representation.
(1) Grant of probate: issued when there is a valid will and the executors are applying.
(2) Grant of letters of administration (with will): issued when there is a valid will but the executors are unable or unwilling to act.
(3) Grant of letters of administration: issued when the deceased died without a valid will (intestacy).
