WE 6 IHT & PET Flashcards

1
Q

What is the IHT rate for a lifetime transfer?

A

20%

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2
Q

What happens if someone dies within 7 years of a lifetime transfer?

A

The lifetime transfer is reassessed to tax using the NRB at the date of death

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3
Q

What are the steps in calculating IHT on lifetime transfers?

A

1) calculate the cumulative total
2) Identify the value transferred
3) Apply exemptions and reliefs
4) Apply NRB and calculate tax
AFTER DEATH
5) apply taper relief
6) give credit for tax paid in lifetime

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4
Q

How is the cumulative total calculated for and LCT or PET?

A

The cumulative total is calculated by adding up the value of all chargeable transfers made in the 7 years prior to the TRANSFER

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5
Q

What value is used to work out the disposal value of a LCT?

A

It is the loss of value to the donor’s estate

NOTE: important for things like sets where the reduction in value of the donor’s estate by gifting a part of a set may be greater than the value received by the donee on receiving a part of a set.

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6
Q

What are the exemptions and reliefs that may apply to a LCT?

A
  • Spouse
  • Charity
  • Family maintenance
  • Annual exemption
  • Small gifts allowance
  • Normal expenditure from income
  • Marriage exemption
  • Business property relief
  • Agricultural property relief
  • Taper relief
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7
Q

What is the Annual Exemption for LCT?

A

£3,000 per year. Can include £3,000 from the previous year if not used.

NOTE: this is the last relief that applies.

NOTE: only applies to lifetime transfers, not on death

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8
Q

Does the “Residence Nil Rate Band” apply to LCTs?

A

No

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9
Q

What is the value of the NRB applicable to a LTC?

A

The NRB at the date of transfer

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10
Q

What is the NRB that applies to a failed PET or re-assessed LCT?

A

The NRB amount as the date of death

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11
Q

What is the percentage 40% IHT due for a failed PET (taper)?

A

0-3 years before death = 100%
3-4 years before death = 80%
4-5 years before death = 60%
5-6 years before death = 40%
6-7 years before death = 20%

NOTE: work out tax first then x by above

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12
Q

Are PETs that have yet to failed taken into account when considering the cumulative total for LCTs?

A

No

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13
Q

Who is liable to pay IHT on LCT during the donor’s lifetime?

A

The donee (i.e. the trust out of the settled assets).

However, if the donees doesn’t pay, the donor becomes liable or he may elect to be liable (this requires grossing up as the funds to pay the IHT have also left his estate).

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14
Q

Who is liable to pay IHT on LCT and failed PETs after the donor’s death and what happens if they don’t pay?

A

the recipient (donee) is.

If the donee doesn’t pay within 12 months of the end of month of death, the PRs become liable

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15
Q

Will the IHT estate always be the same as the estate that passes to the PRs (the free estate)?

A

No. Some assets may pass outside the succession estate such as:
- joint tenant property
- Gifts with reservation of benefit

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16
Q

Who is liable to pay IHT on the “Free Estate”?

A

The PRs - normally from the residue unless a contrary intention appears in the will.

17
Q

Who is liable to pay IHT on the “Succession estate” that is outside of the “Free Estate”?

A

The IHT follows the asset

18
Q

What IHT exemptions only apply to LCTs (I.e. don’t apply on death)

A
  • annual exemption
  • Family Maintenance exemption
  • Small gifts exemption
  • Marriage exemption
  • Normal expenditure out of income
  • Taper relief
19
Q

What is the annual exemption for LCTs?

A

£3,000 + £3,000 from previous year if not used.

20
Q

Who does the family maintenance exemption for IHT apply to?

A
  • Spouse (or former spouse if part of a divorce settlement). Must both be UK dom
  • minor child of either party to a marriage.
  • child over 18 in full time education or training
  • a dependant relative to make reasonable provision for their care.
21
Q

What are the rules for the small gifts exemption for IHT?

A
  • up to £250 per recipient per year (no limit to number of recipients).

NOTE: small gifts allowance cannot be used in combination with any other exemption.

NOTE: if gifts to the person exceed £250, the exemption does not apply at all.

22
Q

What are the rules for the marriage exemption for IHT?

A

A gift to a party to marriage is exempt up to:
- £5,000 if made by a parent of one of the parties,
- £2,500 if made by one party of the marriage to the other
- £2,500 if made by a remoter ancestor (grandparent and up)
- £1,000 in any other case.

NOTE: the exemption is per DONOR and PER MARRIAGE (so you can’t gift £5k to one party to the marriage and £1k to the other and claim marriage exemption on both payments).

23
Q

Can the marriage exemption and the annual exemption for IHT be used for the same gift?

A

Yes

24
Q

What are the rules for the “normal expenditure out of income” exemption for IHT?

A

Exempt if made:
- from donor’s income
- as part of a normal/regular pattern of giving, and
- does not affect the donor’s standard of living.
THERE IS NO UPPER LIMIT TO THIS EXEMPTION.

25
Q

What are the effects of using the Charity exemption for IHT?

A
  • Gifts are fully exempt without limit
  • If a person leaves 10% or more to a charity, a reduced rate of 36% will apply to the rest of the estate.
26
Q

Which assets are not subject to IHT on LCTs

A
  • Discretionary pension lump sum payments
  • Life insurance policies written into trust

NOTE: premiums on Life insurance policies are often covered by the normal expenditure from income exemption.

27
Q

Which assets may benefit most from being given away as a PET?

A

IHT on a PET will be charged by reference to the value at the date of the PET. Therefore, if assets are likely to rise in value, it may be worth making a PET. BUt consider CGT and whether the gift could be made over 2 years.