Wills and Estates 6 IHT & PET

Question 1

What is the IHT rate for a lifetime transfer?

Answer 1

20%

Question 2

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

Answer 2

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

Question 3

What are the steps in calculating IHT on lifetime transfers?

Answer 3

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

Question 4

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

Answer 4

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

Question 5

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

Answer 5

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.

Question 6

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

Answer 6

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

Question 7

What is the Annual Exemption for LCT?

Answer 7

£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

Question 8

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

Answer 8

No

Question 9

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

Answer 9

The NRB at the date of transfer

Question 10

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

Answer 10

The NRB amount as the date of death

Question 11

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

Answer 11

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

Question 12

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

Answer 12

No

Question 13

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

Answer 13

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).

Question 14

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

Answer 14

the recipient (donee) is.

If the donee doesn’t pay by the deadline (12 months) the PRs become liable

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

The IHT follows the asset

Question 18

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

Answer 18

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

Question 19

What is the annual exemption for LCTs?

Answer 19

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

Question 20

Who does the family maintenance exemption for IHT apply to?

Answer 20

• 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.

Question 21

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

Answer 21

• 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.

Question 22

What are the rules for the marriage exemption for IHT?

Answer 22

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).

Question 23

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

Answer 23

Yes

Question 24

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

Answer 24

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.

Question 25

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

Answer 25

• 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.

Question 26

Which assets are not subject to IHT on LCTs

Answer 26

• 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.

Question 27

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

Answer 27

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.