Wills and Estate Administration - Inheritance Tax

Question 1

Nil rate band

Answer 1

£0 - £325,000

Question 2

Who pays IHT?

Answer 2

Anyone domiciled in UK pays IHT on all assets irrespective of where those assets are

Question 3

Non-UK domiciled individual

Answer 3

Subject to IHT only on their UK assets (if they have any)

Non-UK assets are not chargeable to tax (‘excluded property’)

Question 4

Loss to Donor Rule

Answer 4

• The size/value of a gift is measured by how much it reduces the donor’s estate

Question 5

Transfers Outside IHT Scope

Answer 5

• No gratuitous benefit intended: however, if discounted sale not at arm’s length potentially chargeable
• Expenditures for family maintenance

Question 6

Valuation of Gifts

Answer 6

• Typically valued at market value just before transfer made (probate value)
• Unlisted stock: greater a person’s interest the more the stock is worth (represent greater control over the company)

Question 7

Related Property Rule

Answer 7

• Similar property owned by a spouse or civil partner
• If deceased owns certain property and their spouse owns related property and the value of the asset the deceased owns would be higher taking into account the spouse’s property the spouse’s property will be taken into account when valuing estate (asset valued at higher amount)

Question 8

Types of Lifetime Transfers

Answer 8

• Exempt
• Potentially exempt
• Immediately chargeable

Question 9

Exempt Transfers

Answer 9

Most common is transfers to a spouse (during life or at death)

• If recipient spouse not domiciled in UK the inter-spousal exemption is limited to £325,000 (cumulative and does not apply per gift)

Gifts to charity (as long as in UK or EEA)

Gifts made on death via will or deed of variation

Exemptions that only apply to lifetime gifts:

• Small gift exemption: allows donor to give a gift of up to £250 with no IHT consequences (applies per person without limit). An all or nothing exemption (i.e. if you give more than £250 none of this is exempt)
• Gifts on marriage: each parent can give their child up to £5,000. Grandparents can give £2,500 as well as each party to the marriage to eachother. Anyone else can gift £1,000 to each spouse. Gifts larger than applicable marriage exemption are partially exempt (i.e. gift from parent of £7,000, £5,000 would be exempt). Apply per marriage/civil partnership (i.e. father cannot give his daughter £5,000 and his son-in-law £1,000)
• Normal expenditure out of income: regular or habitual in nature (i.e. happens year after year), out of surplus income and do not affect the standard of living of the person making then. No monetary limit, what is ‘surplus’ income will vary from person to person.
• Annual exemption for IHT: £3,000 annual exemption available to reduce IHT value of lifetime transfers. Applied to the first gift made in a tax year that is not otherwise exempt (i.e. applied to earlier gifts before later gifts). Exemption or any unused part can be carried forward one tax year and used in next tax year after that year’s exemption has been used first.

Question 10

Potentially Exempt Transfers (PETs)

Answer 10

• Gift by one individual to another individual (as opposed to a trust) that is not covered by any exemption either in full or in part
• PETs are exempt during donor’s lifetime and become chargeable to IHT if donor dies within 7 years of date of gift
• 7 year clock runs from when transfer made: if donor survives for a least 7 years after date of PET it becomes fully exempt from IHT
• If donor dies within 7 years of a PET it becomes chargeable to IHT and recipient of gift is liable to pay
• IHT payable on the value of the gift less any available exemptions

Question 11

Chargeable Lifetime Transfers (CLTs)

Answer 11

• Predominantly concerned with transfers to a trust (most common are ‘discretionary’ trusts and ‘interest in possession’)
• Immediately chargeable to the extent it exceeds any annual exemption and nil rate band
• Gifts to a bare trust (trusts under which beneficiaries decide when assets are distributed) are not CLTs but are PETs
• Gifts to charitable trusts are exempt
• Gifts of an asset/cash to a company is a CLT but normally transferor receives full value in return for transfer so there is no loss to the donor
• When calculating how much annual exemption is available to offset CLT we count prior PETs first (even though no gift tax owed on PET at time of transfer)

Question 12

CLT Tax Rates

Answer 12

1. 20%: if trustees pay the tax
2. 25%: if donor pays the tax

Also need to look at 7 years prior to gift to trust to see if any other CLTs made in that period. If so, add those transfers to current one and if cumulative total exceeds nil rate band IHT is payable on excess

Question 13

Death within 7 years of PET

Answer 13

• Use nil rate band and IHT rates at date of death
• Nil rate band: £325,000
• IHT rate: 40%
• Base value of PET at the date it was made (less any available annual exemption)
• Look for CLTs made within 7 years prior to PET being made (NOT 7 years prior to date of death)
• Recipient liable to pay IHT due on PET

Question 14

Taper Relief

Answer 14

Available on some PETs depending on the time between the gift and date of death

• 0-3 years: 0% relief
• 3-4 years: 20% relief (i.e. recipient owes 80% of IHT due)
• 4-5 years: 40% relief
• 5-6 years: 60% relief
• 6-7 years: 80% relief

Reduces the tax payable not the value of the gift

Question 15

Additional Death Tax on CLTs

Answer 15

• Have any CLTs been made 7 years prior to death?
• Will also include any PETs that have now become chargeable
• Taper relief can apply to CLTs made at least 3 years prior to donor’s death
• Credit is given by way of a deduction for any lifetime IHT paid on CLT regardless of who paid it (if credit exceeds the IHT payable after any taper relief no refund given, simply no death tax due). Difference between the death tax and lifetime tax paid is additional tax payable by trustees.

Question 16

Reliefs for Business and Agricultural Property

Answer 16

Available for lifetime transfers and transfers on death

For lifetime gifts the relief given before any annual exemption and so applied first

Have immediate effect only for gifts into trusts (i.e. CLTs)

Business relief:

• Reduces value of business property given as a lifetime gift to a trust or on death by either 100% or 50%
• 100% relief applies to sole trader business or interest in a partnership and any shareholding in an unquoted trading company
• 50% relief available for buildings owned by donor and used by a business they control (more than 50% interest) or by a partnership in which they are a partner. Controlling shareholdings in a quoted company also qualify for 50% business relief.
• If company holds some assets as investments they are excepted and business relief will apply to those assets that are not excepted
• Business/company must be a trading entity and not mainly or wholly concerned with investment activity
• Overseas businesses and company shares are eligible
• Transferor must have owned business asset for more than 2 years before the transfer (unless replacing one business property asset with another within a 3 year period or inheriting business property assets from a spouse)

Agricultural relief

• Reduces the value transferred when agricultural property gifted during life or on death
• Given before any annual exemption and normally available at 100%
• Property must be in the UK, Channel Islands, Isle of Man, or EEA
• Applies only to property’s agricultural value
• If owner-occupied, transferor must have owned property for 2 years prior to transfer
• If not owner-occupied, transferor must have owned property for 7 years prior to transfer
• Business relief may also apply once agricultural relief has been applied to the agriculatural value (does not apply to agriculatural property the taxpayer lets to another - this will be regarded as an investment asset)
• Excluded activities include horse grazing, fishing, shooting and other sporting rights

If recipient still owns business/agricultural property or sold it and replaced it with other property the reliefs are available at the time of death

Question 17

Calculating Death Tax

Answer 17

• Deemed to make chargeable transfer equal to net value of assets at date of death
• Net value = Assets - Debts and Liabilities + Funeral Expenses
• Paid by PRs
• No annual exemption is available
• Deduct any PETs which are now chargeable and any CLTs made in the 7 years prior to death from nil rate band
• Any remaining nil rate band is deducted from value of death estate and IHT paid at 40%
• If the entire estate passes to a surviving spouse no IHT is due
• If estate split between a surviving spouse and children the spouse’s proportion is exempt from IHT

Question 18

Valuing the Estate

Answer 18

• Includes all of the assets owned by deceased just before their death
• Generally the open market value of the assets
• Quoted shares: value at date of death published by Stock Exchange
• Property owned by more than one person: no set in stone rule for this (common for co-owned property to be owned by spouses so would fall under related property rule)

Question 19

Allowable Liabilities

Answer 19

• Mortgages, credit card debts, tax owed by deceased and reasonable funeral expenses
• UK probate costs are not deductible
• Once these are deducted you are left with the taxable estate

Question 20

36% tax on death estate

Answer 20

• Achieved by giving 10% + of deceased baseline amount to charity
• Baseline amount = value of estate charged to IHT after deducting all available reliefs, exemptions and available nil rate band (excluding deduction for charitable legacy)
• 36% charged on baseline amount less the amount given to charity

Question 21

Transferable nil rate band

Answer 21

• If deceased does not use their NRB the unused % can be transferred to surviving spouse to increase their NRB on their death
• Can receive unused NRB from multiple spouses but max uplift is 100% (maximum NRB is 2 x the NRB for the year of death)
• Uplifted NRB cannot be used against lifetime tax on CLTs
• Claim needs to be made for executors of second spouse

Question 22

Residence nil rate band

Answer 22

Only applies to death estate and not lifetime gifts

Available when:

• Estate must contain a home which has at some point been used as the deceased’s private residence; and
• The home or the proceeds of the home were left to lineal descendants (children includes step children and adopted children)

Not available to a person/couple without children

RNRB amount is provided for by statute and limited to lesser of value of home or the statutory RNRB amount (£175,000)

Deducted before the general NRB

If deceased’s net estate (assets less liabilities but before exemptions and reliefs) is greated than £2m the RNRB is tapered - £1 for every £2 over £2m (once we get to £2.35m RNRB is lost completely)

Unused % can be transferred to a surviving spouse subject to the first spouse’s RNRB being tapered (can also transfer from up to two spouses, capped at 100% of RNRB for that tax year)

No requirement for descendants to occupy property after death

Value of the estate not just the value of the residence being gifted

Question 23

Quick Succession Relief

Answer 23

• Applies when someone dies within 5 years of paying IHT on some inheritance
• Decreases by 20% for each year between donor and recipient’s deaths
• Property need not be in recipient’s estate on their death

Question 24

Post-Mortem Reliefs

Answer 24

• If PR of estate sell some or all of the assets and they are sold for less than their probate value
• For certain assets the PRs can make a claim to substitute that lower value for the probate value and reduce IHT payable
• These assets are: quoted shares and land/buildings

Calculations unlikely to be required for exam

Question 25

Woodlands Relief

Answer 25

Rare and unlikely to come up on exam

Deceased’s estate included land in the UK which was not eligible for agricultural or business relief but on which trees and underwood are growing

Must have been beneficially entitled to the land for five years prior to death or inherited it on the death of anoher

Relief operates to exclude the value of the woodlands from the estate

Question 26

Anti-Avoidance Provisions

Answer 26

Gifts with reservation of benefit: purporting to give away an asset but continuing to benefit from it until the date of death, considered to be part of the estate at the date of death

• If donor pays market rent whilst continuing to live in the property after they have given it to their children this would not automatically be chargeable to IHT but would be treated as a PET
• If donor no longer retained a benefit at the date of death they can avoid this rule - however, HMRC would treat the release of the reservation as a PET

Pre-owned asset tax rules: impose an income tax charge on benefits received by the former owner of the property if the transfer is not within the gift with reservation of benefit rules and the former owner benefits from an asset they previously owned

Question 27

When is tax due?

Answer 27

• CLTs: later of 6 months from the end of the month in which the CLT is made and 30 April following the end of the tax year of the gift. If donor dies within 7 years, additional tax is due 6 months after the end of the month of death [PRs liable if tax unpaid 12 months after the end of the month of death]
• PETs: any death tax is due 6 months from the end of the month in which the donor dies [PRs liable if tax unpaid 12 months after the end of the month of death]
• Death estate: any death tax is due 6 months from the end of the month in which the donor dies

Question 28

Who pays IHT?

Answer 28

• CLTs: donor or trustees out of trust funds; if donor dies within 7 years, additional tax is paid by trustees
• PETs: recipient of the gift
• Death estate: freehold estate (PRs liable to pay IHT and if will silent as to burden it falls on the residue), settled property in which deceased had an interest (trustees liable and burden falls on trust assets), gifts with reservation of benefit (donee liable but if IHT unpaid 12 months after the end of the month of death PRs liable), property passing outside will/intestacy (PRs liable and IHT borne by beneficiary)

IHT can be paid in 10 equal instalments

Question 29

Exempt Gifts

Answer 29

• Gifts to spouse (unless recipient spouse non-UK domiciled, exemption restricted to £325,000)
• Gifts to UK and EEA charities

Question 30

PRs income tax and CGT

Answer 30

• If assets within death estate produce income the income legally belongs to PRs until assets distributed - must pay income tax on it
• If PRs sell assets and make a profit they will have to pay CGT
• Returns required for each separate tax year that the administration period covers (returns filed by 31 January)
• Instead of annual self-assessment returns PRs may make an informal payment of the total liability for the whole perio of administration together with a single income tax and CGT computation

Question 31

Income Tax

Answer 31

• Personal, personal savings and divident allowances are not available
• If PRs took out a loan to pay IHT the interest on the loan is deductible against income

Question 32

Capital Gains Tax

Answer 32

• PRs deemed to acquire the assets at the date of death (value is the probate value, i.e. market value)
• If post-mortem relief claims made the adjusted value will become the CGT base cost
• PRs receive an annual exempt amount (currently £6,000) for the year of death and the next two tax years
• Capital losses can be offset against gains in the same tax year and excess losses are carried forward
• 20% for general gains and 28% for residential property
• An asset distributed to a beneficiary is not deemed to be a disposal of the PR for CGT purposes
• If a beneficiary is left an asset under the terms of the will they acquire it at the date of death for its probate value
• If/when a beneficiary disposes of an inherited asset any CGT liability calculated by comparing the disposal proceeds with their acquisition cost (i.e. the probate value)