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SQE general > WAE WK3 > Flashcards

WAE WK3 Flashcards

1
Q

What is Inheritance Tax (IHT)

A

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.

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2
Q

What is a chargeable transfer?

A

Any transfer of value that is not classified as an exempt transfer.

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3
Q

Define “transfer of value.

A

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.

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4
Q

What is the basic Nil Rate Band (NRB) for IHT?

A

£325,000. This means that transfers of up to this amount are taxed at 0%.

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5
Q

What is the Transferable Nil Rate Band (TNRB)?

A

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.

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6
Q

What is the Residence Nil Rate Band (RNRB)?

A

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.

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7
Q

What is the maximum combined NRB a couple can utilize?

A

£1 million (combining both spouses’ NRBs and RNRBs).

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8
Q

What is the concept of “cumulation” in IHT calculations?

A

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.

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9
Q

What are the “downsizing rules” in the context of IHT?

A

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.

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10
Q

List five assets eligible for payment of IHT in installments.

A

(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.

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11
Q

What is the time limit for paying IHT?

A

Within 6 months of death.

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12
Q

When does the installment option for paying IHT on a property cease?

A

If the property is sold before all installments are paid, the option ceases, and the outstanding IHT becomes immediately payable.

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13
Q

When must PRs submit the IHT Account (Form IHT 400)?

A

Within 12 months of death, unless the estate is classified as “excepted.”

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14
Q

What are the two categories of “excepted estates” relating to IHT?

A

(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.

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15
Q

Which form is used to correct inaccuracies in the IHT400?

A

Form C4.

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16
Q

What is the Direct Payment Scheme for IHT?

A

A scheme where banks release funds directly to HMRC for IHT payment, allowing PRs to settle IHT liabilities before obtaining a grant of representation.

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17
Q

What is a Potentially Exempt Transfer (PET)?

A

A lifetime gift that may become chargeable to IHT if the donor dies within 7 years of making the gift.

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18
Q

What is a Lifetime Chargeable Transfer (LCT)?

A

A transfer of value made during a person’s lifetime that is immediately subject to IHT.

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19
Q

Describe the main steps involved in calculating the IHT on a death estate.

A

(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%.

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20
Q

When calculating the value of a jointly owned property in a taxable estate, how is the deceased’s share determined?

A

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.

21
Q

When calculating the value of a property held as tenants in common in a taxable estate, what deduction is applied?

A

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.

22
Q

Is a discretionary pension lump sum, written on trust for a beneficiary, included in the taxable estate?

A

No, it is not part of the deceased’s estate and is not subject to IHT.

23
Q

When is a PET made within 7 years of death added back into the taxable estate?

A

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.

24
Q

What is the difference between an IHT exemption and an IHT relief?

A

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.

25
Q

What is the Spouse/Civil Partner Exemption for IHT?

A

Transfers of value between spouses or civil partners are exempt from IHT during their lifetime and upon death.

26
Q

What is the Charity Exemption for IHT?

A

Gifts to registered charities are exempt from IHT.

27
Q

What is Business Property Relief (BPR)?

A

An IHT relief that can reduce the taxable value of qualifying business property, including unquoted shares, some quoted shares, and business interests.

28
Q

What are the rates of relief for BPR?

A

100% relief for qualifying unquoted shares, partnership interests, and sole trader businesses. 50% relief for certain quoted shares and assets used for business.

29
Q

What is the minimum ownership period for BPR to apply?

A

2 years prior to the transfer.

30
Q

What is Agricultural Property Relief (APR)?

A

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.

31
Q

What are the rates of relief for APR?

A

100% relief for agricultural land and 50% relief for certain farm buildings and cottages.

32
Q

Which IHT relief takes priority when both APR and BPR apply to the same asset?

A

APR takes priority over BPR.

33
Q

What is Woodlands Relief?

A

An IHT relief that allows for the deferral of IHT on the value of woodland gifts made after death.

34
Q

What are the ownership requirements for Woodlands Relief?

A

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.

35
Q

What is Quick Succession Relief?

A

An IHT relief that reduces IHT payable on assets that were previously charged to IHT on a transfer within the preceding 2-7 years.

36
Q

What are the rates of relief for Quick Succession Relief?

A

Relief ranges from 20% to 100%, depending on the time elapsed between transfers.

37
Q

What is the form used for a direct payment of IHT from a bank account?

A

IHT423

38
Q

How is the IHT400 submitted to HMRC?

A

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.”

39
Q

What information is required in a C4 corrective account?

A

(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.

40
Q

List five methods that PRs can use to raise funds to pay the IHT due on an estate.

A

(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

41
Q

What is the main purpose of the Inheritance Tax Act 1984 (IHTA)?

A

To prevent the reduction of an individual’s estate value during their lifetime to avoid IHT.

42
Q

When is the reduced IHT rate of 36% applied to an estate?

A

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.

43
Q

What is the qualifying period for APR relief on inherited agricultural property?

A

No qualifying period is required for inherited agricultural property.

44
Q

Besides Woodlands Relief, what other reliefs might apply to woodland?

A

Business Property Relief (BPR) and Agricultural Property Relief (APR).

45
Q

Are PRs typically required to pay IHT liabilities upon submitting the IHT400?

A

Yes, PRs are usually required to pay tax liabilities upon submitting the IHT400, regardless of whether the 6-month deadline has passed.

46
Q

What is the time limit for submitting a corrective account (Form C4) to HMRC?

A

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.

47
Q

When are PRs required to pay IHT on assets subject to the installment option?

A

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.

48
Q

Which entity issues grants of representation?

A

The Probate Registry.

49
Q

List the three main types of grants of representation.

A

(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).

SQE general (24 decks)

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