Wills and Administration - Inheritance Tax

Question 1

What are the three main occasions when IHT may be charged?

Answer 1

(a) On death

(b) Lifetime Gifts made in the 7 years prior to death = “Potentially Exempt Transfers”

(c) Lifetime gifts to a company or trust - IHT automatically chargeable when made (unless the trust is for a disabled person).

Question 2

What are the 4 steps to charging IHT?

Answer 2

1. Identify the transfer of value.
2. Apply relevant exemptions/reliefs.
3. Use up available RNRB (for transfers on death only) and available NRB
4. Calculate tax at the appropriate rate.

Question 3

Step 2: Apply relevant exemptions/reliefs.

What are the main exemptions and when do they apply?

Answer 3

1. The spouse exemption - lifetime gifts and transfers on death.
2. The annual exemption - lifetime gifts only.

Question 4

Step 2: Apply relevant exemptions/reliefs.

What are the main reliefs?

Answer 4

• Business property relief.
• Agricultural property relief.

These apply to both lifetime gifts and transfers on death.

Question 5

Step 3: Calculate tax at appropriate rate.

What are the two bands which provide a 0% rate of tax?

Which of these are used up first?

Answer 5

(a) The nil rate band (NRB) at 0% up to £325,000. Available for both lifetime gifts and transfers on death.

(b) The residence nil rate band (RNRB) at 0% up to £175,000 (but only up to the value of the deceased’s residence). Available only on transfers on death, where there is a “qualifying residential interest”.

The RNRB is used up first.

Question 6

Step 3: Calculate tax at appropriate rate.

What is the principle of cumulation?

Answer 6

• Cumulation is used solely to calculate the NRB.
• Any chargeable transfers made in the seven years prior to death must be added up to determine the remaining NRB. (Lifetime transfers use up the NRB first).

Available NRB = £325,000 - Lifetime Chargeable Gifts.

Essentially, this just means that PETs and CLTs will use up the NRB. PETs are therefore calculated before IHT chargeable on death (while CLTs are immediately chargeable, so they’ll be calculated first anyway).

Question 7

Transfers on death - Step 1: Identify the transfer of value

What three categories of property define the estate for IHT purposes?

Answer 7

(a) Property passing under the will/intestacy.
(b) Property passing out of the will/intestacy to which the deceased is beneficially entitled.
(c) Property included by statute.

Question 8

Transfers on death: Step 1 - Property included by statute

What property is included in the estate for IHT purposes, under statute?

Answer 8

• Trust property in which the deceased had a qualifying interest in possession.
• Property subject to a reservation

Question 9

Transfers on death: Step 1 - Property included by statute

When dealing with trust property, what is a “qualifying interest in possession”?

How does the definition change where the interest in possession arose before 22 March 2006?

Answer 9

• An interest in possession that arose by virtue of a settlor’s death (under the settlor’s will or intestacy).
• Pre-March 2006, any interest in possession (not just those arising by a settlor’s death) ‘qualifies’ - meaning it is included in the estate for IHT purposes.

Interest in possession = interest in the income or enjoyment of the property (e.g. living in it).

“A holds the property on trust for B, remainder to C.”

B has an immediate interest in possession, while C has an interest in capital. However, for tax purposes, B is treated as having an interest in capital, therefore if he dies, the trust will be taxed on his estate.

Question 10

Transfer on death: Step 1

A dies in 2018. She left a will in which the trustees pay the income to B for life, with remainder to C. What is the IHT consequence when B dies?

Answer 10

The trustees must pass the trust property to C. For IHT purposes, B had a qualifying interest in possession, therefore the trust fund is taxed as if it were part of his estate.

Question 11

Transfer on death: Step 1

What is the rule on trust property subject to reservation from the deceased?

20 years ago, A gave jewellery to B, but retained possession of it. Whose estate will be taxed upon A’s death?

Answer 11

Where the deceased gave away property in their lifetime, but did not transfer “possession and enjoyment”, the donor is treated as beneficially entitled to the property.

This is not a PET. A’s estate is taxed, as if she was beneficially entitled to the jewellery (although B will bear the tax).

Question 12

Transfer on death: Step 1

What property passes outside the estate for IHT purposes?

These are not included for IHT purposes, as the deceased did not have a beneficial interest.

Answer 12

• Life assurance polices.
• Pension fund payments to the deceased’s family.

Question 13

Transfer on death: Step 1

What property is excluded from IHT liability?

Answer 13

An interest in remainder.

The book says “e.g. an interest in remainder under a trust created before 2006”. But does it not apply to those created after 2006?

In 2005, Faith created a settlement placing $100,000 on trust for Guy for life, remainder to Hazel. Guy has a qualifying interest in possession; Hazel has a reversionary interest (excluded property).

Question 14

Transfer on death: Step 1

What is the basic valuation principle?

Answer 14

Assets in the estate are valued for IHT purposes at the hypothetical open market value immediately before death.

In selling a share of jointly owned land, the value may be discounted.

Question 15

Transfer on death: Step 1

Explain the modification of the basic valuation principle through the following example: A insures his life for $50,000. Immediately before his death, the value of the policy, if sold, would be a fixed “surrender value” of $25,000. The maturity value is $50,000. Which value is used?

Answer 15

The maturity value of $50,000. The modification provides that where the death itself causes the value to increase or decrease, that change should be taken into account.

Question 16

Transfer on death: Step 1

Explain how quoted shares (shares listed on the Stock Exchange Daily Official) are valued using the following example:

At the date of death, the quoted price per share is 102p/106p. What is the individual share price?

Answer 16

1/4 of the difference between the lower and higher prices, and add to the lower price:

1/4 x 4p = 1.
102 + 1 = 103p.

Question 17

Transfer on death: Step 1

What liabilities owed by the deceased are deductible for IHT purposes?

Answer 17

• Debts and expenses. E.g. gas bills, phone bills, unpaid income tax.
• Reasonable funeral expenses.

Question 18

Transfer on death: Step 2 - Exemptions and Reliefs

What is the spouse/civil partner exemption?

If the spouse is not domiciled in the UK, what is the exemption limited to?

Answer 18

Property in the estate is IHT exempt if passed to the deceased’s spouse or civil partner under the will, intestacy or survivorship.

If the spouse/civil partner is not domiciled in the UK, the exemption is limited to £325,000.

N.B. The qualifying interest in possession rule still applies for the spouse exemption (If the spouse is given a right to income, IHT is charged on her estate).

Question 19

Transfer on death: Step 2

What is the charity exemption?

Exemptions and Reliefs

Answer 19

Property passing on death to a charity is exempt.

Similar exemption for gifts to certain national bodies and those providing public benefit, e.g. museums, art galleries, political parties.

Question 20

Transfer on death: Step 2

What is the business property relief?

How long must the transferor own the business property for it to attract relief?

Exemptions and Reliefs

Answer 20

This reduces the value of a transfer of “relevant business property” by either 50% or 100%.

The transferor must have owned it for:
- two years prior to the transfer.
- Where it was a replacement for another relevant business property, a combined period of two years including the original property.
- If the property was inherited from a spouse, the transferor is deemed to have owned it since the deceased spouse originally acquired it (This does not apply to lifetime transfers between spouses)

Question 21

Transfer on death: Step 2

What types of relevant business property benefit from 100% reduction of value (i.e. No IHT charged on that asset)?

Exemptions and Reliefs

Answer 21

(a) A business or interest in a business (including a partnership share)
(b) Unquoted shares.

Question 22

Transfer on death: Step 2

What types of relevant business property benefit from a 50% reduction?

Answer 22

(a) Quoted shares that the transferor had voting control in immediately before the transfer.
(b) Land, machinery or plant personally owned by the transferor, used for business purposes.

Business purposes includes:
- A partnership of which the transferor is a member.
- A company of which the transferor has voting control.

Question 23

What is the definition of voting control in relation to the business property relief?

Exemptions and Reliefs

Answer 23

Over 50% voting power on resolutions.

Shareholdings of a spouse can in certain circumstances, be combined with the transferor’s, satisfying the test.

Question 24

When does agricultural property benefit from a 100% reduction in value (up to its agricultural value)?

Answer 24

100% reduction
(a) the deceased had the right to vacant possession immediately before the transfer; or
(b) The propery was subject to a letting on or after September 1, 1995.

In all other cases, a 50% reduction will be given.

Question 25

How long must the transferor occupy the agricultural property for it to attract relief?

Answer 25

• 2 years occupation prior to the transfer for the purposes of agriculture; or
• 7 years ownership with someone occupying throughout for agricultural purposes.

Question 26

Transfer on death: Step 3

In a small number of cases, 36% is charged on the remainder after using up the NRB, rather than 40%. When is that special rate applied?

Tax rate

Answer 26

When at least 10% of a defined “component” of the estate (after deduction of other exemptions, reliefs and available NRB) passes to charity.

This is very rare, as substantial gifts to charity are unusual.

Question 27

Transfer on death: Step 3

Explain how you can transfer one spouse’s NRB to another, through the following example:

Guy dies in 2021, without using his NRB. Emily dies on 21 August 2022.

Tax rate

Answer 27

Emily’s estate benefits from Guy’s unused NRB, by the percentage of Guy’s NRB which wasn’t used. 100% of his NRB was not used, therefore she has a total NRB of £650,000.

This is relevant where the first deceased spouse’s NRB was a different band (e.g. £200,000). The percentage of that which wasn’t used will be applied to the current £325,000.

Question 28

What is the Residence Nil Rate Band, and when does it apply?

Answer 28

The RNRB is available in addition to NRB, at £175,000. For it to apply, the deceased must die owning a “qualifying residential interest” that is “closely inherited” upon his death.

Question 29

What is the definition of “qualifying residential interest” in the context of the RNRB?

Answer 29

An interest in a dwelling house which has at any time been the deceased’s residence, which forms part of the deceased’s estate.

Question 30

For a property to be “closely inherited”, who must it pass to?

Answer 30

(a) A direct descendant;
(b) The spouse of the descendant;
(c) Widow of a descendant, unless remarried before the deceased’s death.

Question 31

Where the estate is valued at £2 million or more, how is the RNRB adjusted?

Answer 31

Reduced by every £1 for every £2 over £2 million.

JT own calculation: if estate is 3 million, estate is 1,000,000 over. The RNRB is reduced by 1,000,000/£2 = £50,000.

Question 32

Angela dies on 4 September 2022, leaving her estate to her two children in equal shares. Her husband died four years earlier, leaving all his estate to her. He did not use his RNRB or NRB.

How much RNRB and NRB is available to Angela’s estate?

Answer 32

£175,000 x 2 = £350,000 RNRB.
£325,000 x 2 = £650,000 NRB.

Question 33

In relation to the RNRB, what is the downsizing allowance?

Answer 33

If after July 8, 2015 the deceased downsized prior to death to a less valuable property (thus losing an interest in the property) they are still entitled to the original property’s RNRB if:

1. The property would have qualified for RNRB if retained, and
2. The replacement property or assets (e.g. the sale proceeds) of the equivalent value were left to descendants.

Question 34

Veronica dies intestate, 3 August 2022 survived by her partner William (they did not marry) and their children Brian (19) and Carla (22). She holds the following property:

Bank Accounts (jointly with William) of £95,000.

Life Assurance Policies
- £250,000 payable to estate
- £30,000 written in trust for William
- Unquoted shares: 15% holding in trading company (held for 10 years) £15,000.
- -Building Society Accounts: £19,000
- Chattels: £15,000.

Debts and Funeral Expenses £4000.

How much IHT is payable?

Answer 34

1. Value = Everything less £30,000 written in trust for William (Veronica wasn’t beneficially entitled to the income immediately before death) and debts of £4000. = £390,000.
2. Exemptions and Reliefs

• NO spouse exemption.
• Business Property Relief at 100% of £15,000 (unquoted shares)

Value of estate for IHT: £375,000.

3. £325,000 - Cumulative Total = £325,000 at 0%.
   Remaning £50,000 at 40% = £20,000.

Note that the life assurance policies were taken from the estate as that is how they were written (other than the trust).

JT 2024: why aren’t the joint accounts valued at 50% for IHT purposes?

Question 35

Lifetime transfers: PETs

Certain dispositions are excluded from the definition of “transfer of value”. Give three examples.

Answer 35

• Transfers for maintenance, education or training of transferor’s child under 18.
• The same for an over 18 child where still undergoing full-time education/training.
• Maintenance of a dependent relative.

Question 36

Lifetime Gifts: PETs

Bryn owns a pair of vases, worth £50,000 together. Each one is worth £15,000. Bryn gives one to his wife. Under the “related property valuation rules” (which also apply on death), what is the value of the vase owned by each spouse?

Answer 36

Related Property Valuation rule applies to spouses.

The rule states that the value of each vase is determined by the appropriate portion of the value of the pair Here, 50% x £50,000.

Value of each vase = £25,000.

By virtue of being spouses, the related propety valuation rules apply. So for IHT purposes, each spouse is deemed to own a £25,000 vase. NOTE: related property valuation applies to PETs and on death.

If Bryan were to give away his vase, the value transferred would be £25,000.

Question 37

Lifetime Gifts: exemptions

Between exemptions/reliefs, which of these are applied first?

Answer 37

Exemptions (spouse/civil partner and charity exemptions)

Question 38

Lifetime Gifts: exemptions

What are the exemptions that apply only to lifetime gifts?

Answer 38

1. Annual exemption
2. Small gifts of up to £250
3. Gifts of normal expenditure out of income
4. Gifts in consideration of marriage

Question 39

Lifetime Gifts: exemptions

How is the annual exemption applied? What about unused annual exemptions?

Answer 39

It applies to the first £3000 transferred by lifetime transfers in each tax year.

Unused annual exemptions can be carried forward for one year only, so that a maximum of £6000 may be available. The current year’s exemption must be applied before the previous year’s exemption can be carried forward.

Question 40

Lifetime Gifts: PETs

A lifetime transfer is exempt from IHT if it is a “Normal Expenditure out of income”. What three things need to be shown?

Answer 40

a) It was made as part of the transferor’s normal expenditure;
b) from the transferor’s income; and
c) the transferor was left with sufficient income to maintain their usual standard of living.

Typical example: regular payment from parent to child.

Question 41

Lifetime Gifts: PETs

Lifetime gifts on marriage are exempt up to:

3 situations

Answer 41

a) £5000 by a parent of a party to the marriage.
b)£2500 by a remoter ancestor of a party to the marriage (e.g. grandparent)
c) £1000 in any other case.

Question 42

March 2022, A gives £130,000 to B. She had not made any transfers in the previous two years. She dies 6 years later. What amount will be chargeable?

Answer 42

1. Value transferred = £130,000.
2. Exemption = £6000 (annual exemptions)

£124,000 will be chargeable.

Not given in book, but should be 3. £325,000 - £124,000 = 201,000 @ 0% - Full amount within the NRB, provided no other transfers to consider.

Question 43

Lifetime transfers: LCTs

What are the two main forms of lifetime chargeable transfers (LCTs)?

Answer 43

1. Lifetime transfers into trusts after March 22, 2006.
2. Lifetime transfers into companies.

Question 44

Lifetime transfers: LCTs

Step 3: What is the rate of tax for LCTs?

Answer 44

a) 0% on the £325,000 NRB.
b) 20% on the balance.

Question 45

Lifetime transfers: LCTs

May 1, 2022 - Venetia transfers £50,000 to a trust.

She previously made the following LCTs:

May 1, 2014 - £100,000
May 1, 2017 - £280,000

She has used up all her annual exemptions for the relevant years.

What is the IHT due on the £50,000 transfer?

Answer 45

1. Value transferred = £50,000.
2. Exemptions - none.
3. Tax rate:

Available NRB = £325,000 - £280,000 = £45,000 @ 0%
£5000 @ 20% = £1000.

Question 46

Effect of death on lifetime transfers: PETs

The cumulative total (in step 3) for PETs is made up of:

2 bullets

Answer 46

LCTs and PETs made in the seven years before the PET

Question 47

Exercise

Gina gave the following gifts to her children:

1 September 2016: £200,000 to Claire.
25 June 2020: £200,000 to James.

Gina died on 30 August 2022, leaving her estate (consisting of her house and bank accounts, totalling £400,000) to the two children equally. She made no other gifts.

What is the IHT payable?

Answer 47

2016 PET

1. Value: £200,000
2. Exemptions: £6000
3. Available NRB = £325,000 - £194,000 = £131,000 NRB remains.

2020 PET

1. Value: £200,000
2. Exemptions: £6000
3. Available NRB: £131,000 @ 0%
4. IHT: £194,000 - £131,000 = £63,000 @ 40% = £25,200. (payable by James)

Estate

1. Value transferred: £400,000
2. Exemptions: None
3. NRB: Unavailable. RNRB = £175,000 @ 0%.
4. £225,000 x 40% tax = £90,000 (payable by the PRs)
5. Exemptions: £6000 annual exemption. £394,000. = £194,000.
6. Tax rate:

£325,000 - 194,000 = £131,000 @ 0% Remaining £63,000 @ 40% = £25,200.

Question 48

Effect of death on PETs: Tapering relief

What transfers benefit from tapering relief and how is the tax reduced?

Answer 48

Tapering relief applies to PETs that become chargeable as follows: transfers within:

(a) 3-4 years before death = 80% of the charge is payable.
(b) 4 - 5 years before death = 60% of the charge payable.
(c) 5 - 6 years before death = 40% of the charge payable.
(d) 6 - 7 years before death = 20% of the charge payable.

Question 49

Effect of death on PETs.

1 January 2016: Leonara makes a gift of £96,000 to Isadora. His cumulative total before the gift is £325,000.
1 July 2022: Leonara dies.
What are the IHT consequences for the PET?

Answer 49

1. Transfer of value = £96,000.
2. Exemptions = £6000 = £90,000.
3. Tax rate:
   NRB = 325,000 - 325,000 = 0. £90,000 taxed at 40% = £36,000. But tapered at 20% = £7200.

Question 50

Effect of death on LCTs

The cumulative total for LCTs is made up of:

2 components

Answer 50

(a) LCTs made seven years before the LCT.
(b) PETs made seven years before the LCT that became chargeable on death.

Question 51

Jasmine dies in 2023. She had made the following lifetime gifts:

2010: £300,000 to a trust
2016: £100,000 to her son

Annual exemptions have been used up.

How much IHT is payable on the 2016 PET?

Answer 51

PET in 2016

1. Value: £100,000
2. Exemptions: none
3. Available NRB = £325,000 - £300,000 = £25,000 @0%
4. IHT = £75,000 @ 40% = 30,000

The 2010 LCT used up the available NRB, as it was within 7 years of the PET. Therefore, the estate is affected by any CLTs within 14 years of death.

Question 52

LCT tapering relief on death

Once the IHT on the LCT has been recalculated, tapering relief applies to reduce the recalculated tax where…

Answer 52

…more than three years have elapsed between the transfer and death.

Question 53

Credit and LCT on death

NOTE: additional IHT payable because it becomes chargeable at 40% rather than 20%.

However, credit is given for IHT already paid on the LCT at the time of transfer. When would credit not apply?

Answer 53

Where the LCT’s bill on death is lower than the original amount paid.

Question 54

LCT on death

a) 1 May 2019, George made an LCT of 381,000 to a trust and made no other lifetime gifts. What was the IHT payable?

b) George dies on 1 September 2022. What is the further IHT payable on the LCT?

Answer 54

a)

1. Value transferred = £381,000
2. Exemption = £6000. = £375,000.
3. Tax rate:
   £325,000 at 0% (No cumulated total to be deducted)
   £50,000 at 20% = £10,000 (paid by trustees)

b) Steps 1 and 2 are the same. £375,000.
3. Tax rate:

£325,000 at 0% (No cumulated total to be deducted)
£50,000 at 40% = £20,000.

TAPERING RELIEF:

Death 3-4 years after transfer = 80% of death tax (£20,000). = £16,000.

Credit for tax already paid = £10,000.

Further tax to trustees on death = £6000.

Suppose George died 6-7 years later. The LCT’s bill on death would be 20% x £20,000 = £4000. Credit will NOT be given for the tax already paid as the bill is lower than the original amount paid.

Question 55

Liability and Burden

What is liability?
What is burden?

Answer 55

Liability = amount of tax owed to HMRC.
Burden = who bears the burden of the tax.

Question 56

Liability and Burden: Estate rate

What is the estate rate and how is it calculated?

Answer 56

The average rate of tax applicable to each item of property in the estate.

Total IHT bill/Total chargeable estate x 100.

Question 57

Graham has made no lifetime transfers. He leaves a house (£210,000) to his brother Harry subject to IHT; the rest of his estate (£190,000 net) to his nephew Ian.

a. What is the IHT on the estate?
b. How much of that is payable by Henry?
c. How much of that is payable by Ian?

Answer 57

a. IHT on estate:

1. Value transferred = £400,000.
2. Exemptions = none. Total chargeable estate = £400,000.
3. Tax rate = £325,000 - 0 at 0%. £75,000 at 40%. = £30,000.

Estate rate = 30,000/400,000 x 100 = 7.5%

b. Henry pays £210,000 x 7.5% = £15,750
c. Ian pays £190,000 x 7.5% = £14,250

Question 58

IHT Liability on death

What are the two types of properties in non-settled estate which the PRs are liable to pay?

Answer 58

a) Property passing under will/intestacy.
b) Property (other than trust property) to which the deceased was beneficially entitled immediately before death (e.g. joint property)

Question 59

What are the PR’s liability limited to?

Answer 59

The value of assets received from the estate (or that would have received, if not for their own neglect/default).

Question 60

IHT Liability on death

Who is concurrently liable with the PRs?

Answer 60

Any person in whom property is vested after death or who at any such time is beneficially entitled to an interest in possession in the property.

As such HMRC could in principle claim from a beneficiary or surviving joint tenant.

Question 61

IHT Liability on death

If there is property which was comprised in a settlement immediately before death, who is liable? In what situation is this relevant?

Answer 61

The trustees of that settlement. This is relevant where the deceased had a qualifying interest in possession under a trust.

Again, any person in whom the trust property subsequently vests is concurrently liable with the trustees.

Question 62

IHT Liability

In 1999, Ruth’s father died leaving shares worth £300,000 on trust for Ruth for life, remainder to Arthur. Ruth dies leaving property worth £200,000 which passes under her will to her niece, Tessa.

Ruth didn’t make any lifetime transfers.

What is the IHT on Ruth’s death?
Who is liable?

Answer 62

1. Value transferred = £500,000.
2. Exemptions = none.
3. Tax rate:
   £325,000 at 0%
   £175,000 at 40% = £70,000.

b) Who is liable to pay the tax?

The trustees are liable to pay: £300,000 x the estate rate (70,000/£500,000) = £42,000.

Arthur, the remainderman will only be concurrently liable if trust property is transferred to him before the tax is paid.

Ruth’s PRs are liable for the remainder (£70,000 - £42,000) = £28,000.

Question 63

Additional Liability of PRs

If the deceased gave away property but reserved a benefit which they continued to enjoy immediately befored death, who is liable to pay tax?

Answer 63

The transferee is primarily liable, but if the tax remains unpaid 12 months after the end of the month of death, the PRs become liable.

Question 64

IHT Liability for PETs

If a person dies within seven years of making a PET, who is liable?

Answer 64

Primarily the transferee, but if the tax is unpaid 12 months after the end of the month of death, the PRs become liable.

Liability of PRs is limited to the extent of assets received (or would have received if not for their neglect/default)

Question 65

PRs cannot escape liability on the grounds that….
Therefore they should ideally….

Answer 65

…that they have distributed the estate, therefore they should delay distribution until IHT on all lifetime gifts has been paid.

Question 66

IHT Liability on LCTs

Who is primarily liable for IHT on LCTs, and who else may HMRC claim from?

Answer 66

The transferor is primarily liable, but HMRC may also claim from the trustees.

Question 67

IHT Liability: LCT and Grossing up

What is the rate of tax immediately payable for an LCT if the trustees pay? What is the rate if the transferor pays?

Answer 67

The rate that the trustees pay is 20% for an LCT.
The rate that the transferor pays is 25% (the grossed up rate).

Question 68

Burden of IHT

If the will is silent, what is the default position on death?

2 default positions

Answer 68

The IHT on property which vests in the PR is payable as a testamentary expense

“IHT on joint property is borne by the surviving joint tenant” - contradicts what was earlier said. Assume it is paid by PRs, as that’s what most sources say.

Question 69

Time for payment: Death estates

What is the basic rule regarding time for IHT payment on death?

Answer 69

IHT is due for payment 6 months after the end of the month of death.

Question 70

Time for payment: Death estates

Some property may be paid in 10 equal yearly instalments, the first falling due six months after the end of the month of death. The estate rate is used to determine how much tax is attributable to the property. To which property does the instalment property apply?

4 instalment property types

Answer 70

(a) Land
(b) A business/interest in a business
(c) Shares (quoted or unquoted) which immediately before death gave the deceased control of the company.
(d) Unquoted shares which do not give control if either:
(i) the holding is sufficiently large; or
(ii) HMRC is satisifed that the tax cannot be paid in one sum due to hardship; or
(iii) the IHT attributable to the shares and any other instalment property amounts to at least 20% of the IHT payable on the estate.

Question 71

Time for payment: Death estates

Unquoted shares that do not give the deceased control may still be eligible for instalments if “the holding is sufficiently large”. What does this mean?

Instalment property

Answer 71

• The holding is at least 10% of the nominal value of the company’s shares, and
• Worth more than £20,000

Question 72

Time for payment: Death estates

Where the instalment option is exercised, how is interest paid?

2 different cases

Answer 72

1. For shares, business and agricultural property, instalments carry interest only from the date when each instalment is payable.
2. For all other land, interest is payable (apart from the first instalment) for each instalment on the amount of IHT outstanding from the previous year

Question 73

Time for payment: PETs

When is IHT due for PETs that become chargeable?

Answer 73

6 months after the end of the month of death.

Question 74

Time for payment: LCTs

At the time of transfer, when is IHT on LCTs due?

Answer 74

1. Where the LCT was made within the period of 6 April - 1 October, IHT is due on 30 April the following year.
2. If not made between those dates, IHT is due 6 months after the end of the month the LCT was made.

Question 75

Time for payment: LCTs

Following death within seven years of the LCT, when is the additional IHT due?

Answer 75

6 months after the end of the month of death.

Question 76

Time for payment: LCTs

Xander, who was divorced, dies on 4 May 2022, leaving an estate for which £150,000 IHT is due. His taxable estate (£800,000) comprises instalment property (a house) of £240,000 and non-instalment property of £560,000 (of which, £200,000 is Xander’s share of a joint bank account held with his brother Zak).

Xander left a will, leaving the residue to his newphew. There is no mention of burden.

Q1: What is the IHT liability?
Q2: What is the burden?
Q3: When should IHT be paid?

Answer 76

Q1: Liability = £150,000
Q2: Burden - default rules apply:

a) Zak bares burden of joint bank account:

£200,000 x estate rate (150,000 x 800,000) = £37,500.

b) PRs liable for property passing by will, (paid from residuary): £600,000 x estate rate (150,000 x 800,000) = £112,500.

Q3: The house qualifies as instalment property. The PRs pay £240,000 x estate rate = £45,000, which can be paid as £4500 x 10 annual instalments.

Question 77

Anti-avoidance

The Disclosure of tax avoidance schemes (DOTAS) requires certain schemes to be disclosed to HMRC. When will an arrangement fall within its ambit?

2 conditions

Answer 77

• One of the main purposes is to enable a person to obtain a tax advantage in relation to IHT.
• There is at least one contrived step without which a tax advantage couldn’t have been obtained.

Question 78

Tax avoidance

The General Anti-Avoidance rule (GAAR) enables HMRC to counteract “abusive” tax arrangements. What is the rule and when will an arrangement be subject to it?

Answer 78

An arrangement will be subject to the GAAR if:

• it would be reasonable to conclude that the obtaining of a tax advantage was one of the main purposes.
• it is abusive, meaning: entering into or carrying out the arrangement cannot reasonably be regarded as a reasonable course of action (the double reasonableness test)

If an arrangement falls foul of the GAAR, HMRC may counteract the advantage and, if appropriate, impose a penalty.