WILLS & ESTATES

Question 1

What is IHT?

Answer 1

Tax paid on ESTATE OF DECEASED person
- applies to UK assets of UK resident taxpayers
- Worldwide assets of UK-domiciled taxpayers

Question 2

How are IHT rates set?

Answer 2

Annual budget for given TAX YEAR sets IHT rates {tax year runs 6th April 2024 - 5th April 2025}

Question 3

What are this tax year’s (2024-2025) three rates?

Answer 3

Nil Rate Band = 0%
Lifetime rate = 20%
Death rate = 40%

Question 4

What are the THREE IHT trigger events?

Answer 4

1. POTENTIALLY EXEMPT TRANSFERS (PETs)
2. LIFETIME CHARGEABLE TRANSFERS (LCT)
3. DEATH

Question 5

What are PETs?

Answer 5

Lifetime TRANSFERS OF VALUE which COULD become chargeable to IHT depending on whether transferor survives for 📅 7 YEARS AFTER TRANSFER.

Only failed PETs (i.e. transferor x survives for seven years) are chargeable

Question 6

What are LCTs?

Answer 6

lifetime TRANSFERS OF VALUE which ARE 📅IMMEDIATELY CHARGEABLE to IHT at lifetime rate.

Also, reassessed if the transferor dies within 7 years.

Question 7

What about on death?

Answer 7

when person dies, deemed transfer of all assets they own (📖s4 IHTA. IHT chargeable on this TRANSFER OF VALUE.

Question 8

What is IHT payable on?

Answer 8

IHT = payable on value transferred by a ‘chargeable transfer’ (s1 IHTA)

Chargeable transfer = ‘transfer of value’ made by individual which is not an ‘exempt transfer’ (s2(1) IHTA)

Transfer of Value’ = ‘disposition’ which results in immediate decrease in value of the individual’s estate (s3(1) IHTA).

🧠Broadly, this means gifts but can also mean transactions at undervalue - difference in value counts as a gift. Applies to gifts of all forms of property (i.e. anything with monetary value).

‘Value’ depends on the 🔫trigger event:
For lifetime transfers 🎂= assessed by reference to loss in value to donor

For death estate ☠️= calculated by reference to market value of items in estate on date of death (s160 IHTA)

Question 9

Can gifts be subject to IHT?

Answer 9

YES - since ‘transfer of value’ is a ‘disposition’ which results in an immediate decrease in VALUE of the individual’s estate (s3(1) IHTA).

🧠Broadly, this means gifts but can also mean transactions at undervalue - difference in value counts as a gift. Applies to gifts of all forms of property (i.e. anything with monetary value).

‘Value’ depends on the 🔫trigger event:
For lifetime transfers 🎂= assessed by reference to loss in value to donor

For death estate ☠️= calculated by reference to the market value of items in the estate on the date of death (s160 IHTA)

Question 10

What does ‘value’ mean in context of lifetime transfers?

Answer 10

For lifetime transfers 🎂= assessed by reference to loss in value to donor

Question 11

What does ‘value’ mean for death estate?

Answer 11

For death estate ☠️= calculated by reference to the market value of items in the estate on the date of death (s160 IHTA)

Question 12

What is the Nil Rate Band (NRB)?

Answer 12

NRB: Indivs have basic nil rate band of 🤏£325,000 (NRB) i.e. they can make £325k of chargeable transfers at a rate of 0% - meaning no tax due 🥂

Question 13

What is transferable nil rate band (TNRB)

Answer 13

TNRB: An individual’s surviving spouse or CP can inherit unused portion of their based NRB – known as ‘transferable nil rate band (TNRB)

Question 14

What is the residence nil rate band (RNRB)?

Answer 14

ADDITIONAL nil rate band (currently £175,000) for indivs who die on/after 6 April 2017 if they leave their family home to a direct descendant - known as ‘residence nil rate band’ (RNRB)

Question 15

What is transferable TNRB?

Answer 15

As with basic NRB, an individual’s surviving spouse or CP can inherit the unused portion of their RNRB.

Question 16

Is transferor does not survive for 7 years after making a PET, what happens?

Answer 16

It becomes chargeable alongside their DEATH estate.

Question 17

What is the AIM of a PET?

Answer 17

prevent individuals avoiding IHT by giving away property shortly before death.

Note: 🧠Gifts to companies and gifts made by closed companies have different rules which go beyond module scope!

Question 18

In summary, what is the tax treatment of a PET?

Answer 18

1. Transfer is NOT CHARGEABLE at point made, no IHT payable yet
2. Becomes FULLY EXEMPT if transferor survives SEVEN YEARS from date of PET
3. If the transferor DIES WITHIN 7 YEARS after making PET, the PET ‘fails’ and becomes a chargeable transfer and thus subject to IHT.

Question 19

Tax treatment of LCTs?

Answer 19

Tax Treatment of LCT
LCT is chargeable transfer 📅when it is made. IHT payable on chargeable value of LCT at the 🤏lifetime rate of 20%
If transferor survives 📅seven years following the LCT, there is no further charge to tax.
If transferor dies 📅within seven years, the LCT will be reassessed to tax at the 🤏death rate of 40%, using the NRB at the date of death.

Question 20

What scenario will give rise to an LCT?

Answer 20

ALL lifetime transfers of value made by person into a trust on or after 📅22 March 2006 will give rise to an LCT.

Question 21

What is the Tax treatment of deceased’s estate on death?

Answer 21

@ death of person, there is deemed transfer of all the assets they own at date of their death - 📖s4 IHTA

Deemed transfer -> IHT charge on death

Property in taxable estate = valued at price it might reasonably be expected to fetch if sold on the open market immediately before the death (s160 IHTA).

NOTE ⚠️: Taxable death estate is NOT same as succession estate - so need a separate calculation of value of estate for IHT purposes.

In addition to the IHT for the death estate, any PETs or LCTs made 📅in the seven years before death must be reassessed to IHT.

Question 22

What is CUMULATIVE TOTAL in eyes of HMRC?

Answer 22

HMRC consider TOTAL chargeable value of ALL chargeable transfers made IN THE PREVIOUS 7 YEARS to determine the cumulative total.

Question 23

How do you calculate the available NRB?

Answer 23

Full NRB minus Cumulative Total.

Question 24

What are the two ways around paying IHT?

Answer 24

🎁Gifts to certain individuals or other entities are exempt from IHT - i.e. can be made completely free from IHT and do not use up the NRB
🎁Gifts of particular assets benefit from reliefs. Where conditions of reliefs are met, amount of IHT payable is reduced (sometimes by 100%)

Question 25

Steps for calculating IHT on Lifetime Transfers

Answer 25

A. Calculate cumulative total
B. Identify value transferred
C. Apply exemptions and reliefs
D. Apply basic NRB and calculate tax
E. Apply taper relief
F. Give credit for tax paid in lifetime.

Question 26

Steps for calculating IHT on Death Estate?

Answer 26

A. Calculate the cumulative total
B. Identify assets included in taxable estate
C. Value taxable estate
D. Deduct Debts/Expenses
E. Apply exemptions & reliefs
F. Apply RNRB
G. Apply basic NRB and calculate Tax.

Question 27

What is death estate also known as?

Answer 27

Taxable estate.

Question 28

What does TNRB allow?

Answer 28

TNRB allows surviving spouse to take advantage of unused portion of deceased’s basic NRB.

If married individual dies and some/all of their NRB remains unused, the PRs of the surviving spouse (or CP) can claim an increase in the survivor’s NRB equal to the unused percentage of the first spourse’s NRB.
Amount of TNRB = equal to % of NRB sum on date of survivor dies.

Benefits tax payer as estate of surviving spouse will benefit from any increase in NRB threshold which occurs after first death. E.g. if NRB was £312k at time of death 1, but £325k at time of death 2, the amount of TNRB would be calculated with reference to £325k not the lower figure of £312l. If first spouse to die had used 50% of their NRB, when the second spouse died the transferable amount is £162,500 (i.e. 50% of £325k).

Answer 29

UP to TNRBs - but