Wills - IHT

Question 1

What are the three main occasions when IHT is charged?

Answer 1

1) On death, inheritance tax (IHT) is charged on the value of the estate

2) Lifetime gifts made within 7 years of death (PETs - potentially exempt transfers)

3) Lifetime gifts to a company or into a trust

Question 2

What is the nil rate band (NRB) for the tax year 2024/25?

Answer 2

£325,000 (frozen until 2027/28)

Question 3

What is the residence nil rate band (RNRB) for 2024/25?

Answer 3

£175,000

Question 4

How is the NRB affected by chargeable lifetime transfers in the 7 years before death?

Answer 4

Any chargeable transfers within 7 years reduce the amount of NRB available at death (cumulation).

Question 5

What is the rate of IHT above the nil rate band (NRB)?

Answer 5

40% unless the estate qualifies for a 36% rate by leaving 10% or more to charity.

Question 6

What is the effect of the spouse or civil partner exemption under IHT?

Answer 6

Any transfer to a spouse or civil partner is exempt from IHT, both during lifetime and on death (unlimited exemption).

Question 7

How much can be gifted annually tax-free under the annual exemption?

Answer 7

£3,000 per year. If unused, it can be carried forward for one year, allowing up to £6,000 of exemptions (maximum!)

Question 8

How does tapering relief apply to PETs?

Answer 8

Tapering relief reduces the tax due on PETs if the donor survives 3–7 years. The reduction is based on the number of years passed:
3–4 years: 80%
4–5 years: 60%
5–6 years: 40%
6–7 years: 20%

Question 9

What qualifies for business property relief (BPR)?

Answer 9

100% relief applies to:
- A business or interest in a business.
- Shares in unquoted companies (firm that isn’t on the stock exchange).
- 50% relief applies to land, buildings, machinery, or plant used in a business, and shares in quoted companies if the transferor had voting control.

To maintain the relief, the transferee must still own the business property at the time of the transferor’s death.

Question 10

What is agricultural property relief? (APR)

Answer 10

APR reduces the value of agricultural property for IHT purposes, up to 100% for property occupied by the owner for agriculture purposes for 2 years, or owned for 7 years while being occupied by another.

Question 11

When is IHT due on lifetime chargeable transfers? (LCTs)

Answer 11

If made after 5 April and before 1 October, the IHT is due on 30 April the following year. For other LCTs, IHT is due 6 months after the transfer month.

Question 12

What happens to the NRB if the deceased’s spouse didn’t use their full NRB?

Answer 12

The surviving spouse’s NRB can be increased by the percentage of the unused NRB of the first spouse, up to 100%, allowing a total of up to £650,000 in NRB.

Question 13

What is the 7-year rule for potentially exempt transfers (PETs)?

Answer 13

If the donor survives 7 years after making the PET, it becomes fully exempt from IHT. If they die within 7 years, the PET becomes chargeable.

Question 14

How does the related property rule work?

Answer 14

A: The related property rule applies where connected persons (e.g., spouses) own a set of related assets (like a pair of valuable items). The value is calculated as a proportion of the value of the set, not the individual item.

E.g. if a pair of spouses own two glasses that are worth £10 each but £50 as a set, each would be worth £25 when both are owned by a married couple.

Question 15

What is the IHT rate for lifetime transfers into trusts or companies?

Answer 15

20%, applied on the amount exceeding the NRB.

Question 16

When can IHT on an estate be paid in instalments?

Answer 16

IHT can be paid in instalments over 10 years for land, business property, and certain shares.

Question 17

What happens if a property subject to instalment payments is sold?

Answer 17

All remaining IHT and interest must be paid immediately if the property is sold.

Question 18

What is grossing up in IHT?

Answer 18

Grossing up occurs when the donor pays the IHT on a gift, increasing the value of the transfer since the gift includes both the asset and the tax on it (as opposed to the trustees paying it which would result in a lower gift amount but also less tax on it).

Question 19

How is tax on jointly owned property calculated when one owner dies?

Answer 19

The deceased’s share of the joint property is included in their estate for IHT purposes, and IHT is apportioned according to the estate rate.

Question 20

What is the IHT estate rate?

Answer 20

The estate rate is the average rate of IHT applied across the estate. It is calculated by dividing the total IHT by the total value of the chargeable estate.

Question 21

How is IHT calculated on quoted shares?

Answer 21

IHT is calculated based on the Stock Exchange Daily Official List at the date of death. Use one-quarter of the difference between the high and low prices, added to the lower price.

Question 22

What is the exemption for gifts made on marriage?

Answer 22

£5,000 by a parent.
£2,500 by a grandparent or ancestor.
£1,000 by any other person.

Question 23

What qualifies for the normal expenditure out of income exemption?

Answer 23

Lifetime gifts are exempt if they are made regularly from the transferor’s income and leave them with enough income to maintain their usual standard of living.

Question 24

How is IHT calculated on a lifetime gift if the donor dies within 7 years?

Answer 24

The gift is treated as a potentially exempt transfer (PET), and if the donor dies within 7 years, it becomes chargeable. The tax due is based on the cumulative total of gifts in the 7 years before death, reduced by any available nil rate band.

*Note: for each transfer, you need to look back and see what transactions have taken place in the 7 years before it - this will affect the NRB available.

Question 25

What happens if a PET becomes chargeable due to the donor’s death within 7 years?

Answer 25

The PET becomes a chargeable transfer. The value of any earlier chargeable transfers (in the 7 years before the PET) is deducted from the nil rate band, and tax is calculated at 40% on any amount exceeding the remaining nil rate band.

Question 26

What is reservation of benefit and how does it affect IHT?

Answer 26

If a person gifts an asset but continues to benefit from it (e.g., staying in a house they’ve gifted), the property is considered part of their estate at death for IHT purposes, as if the gift was never made.

Question 27

What are excluded properties for IHT purposes?

Answer 27

Excluded properties include reversionary interests (future interests under a settlement created before 22 March 2006), property situated outside the UK held by non-UK domiciliaries, and certain government securities.

Question 28

How does business property relief (BPR) affect shares in unquoted companies?

Answer 28

BPR allows 100% relief on the value of shares in unquoted trading companies, meaning no IHT is payable on such shares if certain conditions are met (e.g., holding the shares for at least 2 years before transfer).

Question 29

What is the residence nil rate band taper threshold?

Answer 29

The residence nil rate band (RNRB) is reduced by £1 for every £2 the estate exceeds £2 million. For example, an estate of £2.1 million would reduce the RNRB by £50,000, leaving £125,000 available.

Question 30

What are the conditions for agricultural property relief (APR) to apply at 100%?

Answer 30

100% APR applies if the property has been occupied for agricultural purposes for at least 2 years by the owner or 7 years if occupied by someone else. The relief applies to the agricultural value (which is likely to be much less), not the market value.

Question 31

What is the effect of a discretionary trust on IHT?

Answer 31

Transfers into a discretionary trust are considered lifetime chargeable transfers (LCTs), taxed at 20% immediately if over the nil rate band.

Question 32

How are debts and liabilities deducted from the estate for IHT purposes?

Answer 32

Debts that the deceased owed at the time of death (such as utility bills, outstanding loans) can be deducted from the estate’s value before calculating IHT, provided they were incurred for full value (money or money’s worth).

Question 33

What is the annual exemption for small gifts, and how does it apply to multiple gifts?

Answer 33

An individual can make as many small gifts of up to £250 per person per tax year that are exempt from IHT, provided that no other exemption (e.g., the £3,000 annual exemption) applies to the same recipient.

Question 34

What are the rules for IHT on joint property when one owner dies?

Answer 34

When a joint owner dies, only their share of the property is included in their estate for IHT purposes. If the property passes by survivorship, the surviving joint tenant may be responsible for any IHT attributable to their share

Question 35

What is the special 36% IHT rate and when does it apply?

Answer 35

The 36% rate applies if 10% or more of the deceased’s net estate (after deducting the NRB and any reliefs) is left to a registered charity. The reduced rate applies to the remaining estate after the charitable gift.

Question 36

What is the cumulative period for lifetime chargeable transfers (LCTs)?

Answer 36

LCTs remain chargeable for 7 years after they are made. If the transferor dies within 7 years of making the LCT, the transfer is recalculated for IHT purposes at death rates, and the trustees may owe additional tax.

Question 37

What happens to the unused residence nil rate band (RNRB) on the death of the first spouse?

Answer 37

The unused RNRB can be transferred to the surviving spouse, allowing them to benefit from both their own RNRB and their deceased spouse’s, potentially doubling the total RNRB available to £350,000.

Question 38

What are excluded assets from IHT for non-domiciled individuals?

Answer 38

Non-UK domiciled individuals are not subject to IHT on their foreign assets, such as overseas property or investments. These are considered excluded property for IHT purposes.

Question 39

How is IHT calculated for life insurance policies?

Answer 39

If the life insurance policy is written in trust for a named beneficiary, it is excluded from the deceased’s estate. If it’s not in trust, the maturity value at death is included in the estate and subject to IHT.

Question 40

How does the maintenance, education, or training exemption work for lifetime transfers?

Answer 40

Transfers for the maintenance, education, or training of a child under 18 (or over 18 if in full-time education) are exempt from IHT, provided the payment is reasonable and for the child’s benefit.

Question 41

How is IHT liability distributed when property passes via survivorship?

Answer 41

The surviving joint tenant is liable for the IHT on the deceased’s share of joint property, as the property passes outside of the will or intestacy rules.

Question 42

What is the 4 step process for calculating inheritance tax on an estate?

Answer 42

1)Identify the transfer of value.
2) Find the value transferred.
3) Apply relevant exemptions and reliefs (e.g., spouse or charity exemptions, business property relief).
4) Calculate tax at the appropriate rate, taking into account the nil rate band (NRB) and residence nil rate band (RNRB).

Question 43

How is tax calculated on an estate that includes a qualifying residential interest?

Answer 43

The first £175,000 of the residence value that is closely inherited (e.g., by children or grandchildren) is taxed at 0%, using the residence nil rate band (RNRB).

Question 44

What are the conditions for a lifetime gift to be a potentially exempt transfer (PET)?

Answer 44

A PET is a gift made by an individual to another individual or into a disabled trust. If the donor survives seven years, the transfer is fully exempt; if the donor dies within seven years, the gift becomes chargeable.

Question 45

What is the general anti-avoidance rule (GAAR) in relation to IHT?

Answer 45

GAAR applies to counteract abusive tax arrangements. An arrangement is considered abusive if its main purpose is to obtain a tax advantage, and it cannot reasonably be considered a reasonable course of action (double reasonableness test)

Question 46

What is the IHT liability of trustees when a trust is involved in the estate?

Answer 46

Trustees are liable for IHT on any property within the trust if the deceased had a qualifying interest in possession. They must ensure the tax is paid from the trust assets.

Question 47

How does the IHT liability on trust property affect beneficiaries?

Answer 47

If trustees do not pay IHT on the trust property before distributing assets, beneficiaries who receive those assets may become liable for the unpaid IHT.

Question 48

Who is primarily liable for IHT on potentially exempt transfers (PETs)?

Answer 48

The recipient of the PET (the transferee) is primarily liable if the donor dies within 7 years, making the gift chargeable to IHT. However, the personal representatives (PRs) can become liable if the transferee doesn’t pay.

Question 49

Who bears the burden of IHT on jointly owned property?

Answer 49

The surviving joint tenant is liable for IHT on the deceased’s share of jointly owned property, as the property passes outside of the will or intestacy and does not form part of the residuary estate.

Question 50

How does burden of IHT differ from liability for IHT?

Answer 50

Liability refers to who must pay the IHT to HMRC (e.g., PRs, trustees, beneficiaries). Burden refers to who ultimately bears the cost of the tax, which can be shifted by will provisions or defaults to the residuary estate.

Question 51

What happens to the burden of IHT if the will does not specify who pays the tax?

Answer 51

If the will is silent on the burden of IHT, the default rule is that the tax on assets passing via the will is paid from the residuary estate. The tax on jointly owned property is borne by the surviving joint tenant.

Question 52

When is IHT due for payment after a death?

Answer 52

IHT on the death estate is due 6 months after the end of the month in which the death occurred. However, PRs often pay earlier to obtain the grant of representation and begin the estate administration.

Question 53

What are the consequences of late IHT payments?

Answer 53

If IHT is not paid within the 6-month period, interest is charged on the outstanding amount from the due date until payment is made.

Question 54

What happens if instalment option property is sold before all IHT instalments are paid?

Answer 54

If instalment property (e.g., land or business assets) is sold, the remaining unpaid IHT and any outstanding interest become immediately payable.

Question 55

When can PRs or beneficiaries be held secondarily liable for IHT?

Answer 55

If a lifetime transferee (recipient of a PET or LCT) does not pay the IHT within 12 months of the death, PRs or trustees may become secondarily liable for the tax, limited to the assets they received.

Question 56

What is the burden of IHT for property left in a will but subject to a trust?

Answer 56

If property in the will is subject to a trust, the trustees are responsible for paying IHT attributable to that property. Beneficiaries who receive the property are secondarily liable if trustees fail to pay.