🖋️ Wills 3: IHT Flashcards
Steps for calculating
- Identify transfer of value
- Find the value of the transferred
- Apply any relevant exemptions and reliefs
- Calculate tax at appropriate rate
3 circumstances it arises
- On death estate
- PETs-lifetime gifts to individuals
- LCT-transfers to trusts/companies
What is the ‘estate’ on death for IHT purposes
All prop deceased beneficially entitled to immediately before death, including property :
i) Passing under will/intestacy
ii) which deceased beneficially entitled to
iii)included because of statutory provisions
What is included in the estate for IHT purposes because of statutory provisions
- Certain trust property: Where entitled to income, whole trust fund is taxed as if part of Bs estate (B has ‘qualifying interest in possession’)
-
Property given away during lifetime but subject to a reservation at time of death
(Ie. Where still retain possession and enjoyment of prop/not entirely excluded from enjoying the property)
3
What is NOT classed as ‘estate’ on death
Where not beneficially interested in prop immediately before death :
1. Life insurance on trust for named beneficiary
2. Lump sum from pension to deceased’s fam
3. Excluded prop: remainder interest in trust where life tenant still alive (whoevers getting income from the trust pays the tax)
What is a PET
Any gift made by individual to another individual or into a disabled trust
EXCEPT
◊ for maintenance, education or training of their kids under 18 or over 18 if in full time ed/training
◊ For maintenance of dependent relative
Is a PET chargeable to IHT?
Not chargeable when made, if transferor dies within 7y,becomes chargeable and transferee will be liable
What is a LCT
transfer to company/trust (unless trust for disabled person)
Is a LCT chargeable to IHT
- Chargeable when made
- On death, if made in 7y pre death recalculate and , trustees liable for extra
What is the ‘value transferred’ for the death estate?
Open market value of assets in death estate
LESS debts
LESS reasonable funeral expenses
Land held as JT NOT with spouse reduced by:
* 15% residential prop
* 10% for commercial prop
How are shares valued for the ‘death estate’?
Quoted shares-value taken from Stock Exchange Daily Official List for date of death/nearest trading day (quotes 2 prices)
To value, take 1/4 of difference between lower and higher price and add to lower price
What is the ‘value of the transferred’ for a PET?
Amount of reduction of transferors estate
Estate=aggregate of all prop they’re beneficially entitled
What are the related property rules
For prop that is worth more as a set, if spouses own one each, treated as part of same group =deemed to own half of joint value
Eg. 2 varses worth £50k together and £15k each and spouses own one each, prop treated as same group so value transferred between them would be £25k
What exemptions and reliefs are available for both death and lifetime transfers?
- Spouse/civil partner exemption : Transfer 100% exempt if to spouse/civil partner
- Charity exemption of 100%
- Business property relief
- Agricultural relief
Effect of spouse exemption
Transfer 100% exempt if to spouse/civil partner
If transferee not domiciled in the UK, limited to £325k
Conditions for business property relief to apply and effect
CONDITIONS
1. Business is ‘trading‘-selling product/service (as opposed to dealing with investments/land)
2. Transferor owned assets for 2y OR assets are replacement for relevant business prop where combined period of ownership is 2y (if inherited from spouse, deemed to have owned from date it was originally acquired by spouse)
EFFECT
100% for relevant business property:
1. Business or interest in business (inc. partnership)
2. Co shares not listed on recognised stock exchange
50% for any other relevant business property
1. co shares listed on recognised stock exchange if transferor had voting control immediately prior transfer
2. Land, buildings, machinery, plant owned by transferor but used for business purposes of partnership (which member of) or co which had voting control (50% votes (inc. spouses votes))
Conditions for Agricultural relief to apply and effect
CONDITIONS
a. Prop was occupied by transferor for purposes of agri for 2y prior to transfer
b. OR prop was owned by transferor for 7y prior and was occupied by someone throughout that period for the purposes of agriculture
EFFECT
100% where:
a. transfer had the right to vacant possession immediately before transfer
b. OR prop was subject to a letting commencing on/after 1 Sept 1995
50% in other cases
What extra reliefs and exemptions are only available for lifetime transfers (PETs/LCTs)
- Annual exemption
- Small gifts
- Normal expenditure out of income (eg. To kid at uni)
- Gifts on marriage
What is the effect of the annual exemption?
First £3k transferred in each tax year exempt
Unused can be carried forward 1y (current year must be used first)
What is the effect of small gifts exemption
Of less than £250 to one person exempt
What is the effect of Normal expenditure out of income (ie. To kid at uni) relief
Exempt if:
1. Made as part of normal expenditure
2. Out of transferers income
3. After, left with sufficient income to maintain usual standard of living
What is the effect of the gifts on marriage exemption
Exempt up to
* £5k by parent
* £2.5k by remoter ancestor
* £1k in any other case
Value remaining after will be chargeable if transferor dies within 7y
2/3 steps for calculating tax at the appropriate rate (step 4)
- Cumulate NRB
- Apply rate of tax
- For PET/LCT Apply relief to tax: taper relief
What is cumulation
If another chargeable transfer made within 7y before current one, this reduces the nil rate band available to that current transfer (must be cumulated with current one)
=lifetime transfers use up NRB first, reducing amount available to estate
