Wills (IHT) Flashcards
(90 cards)
1
Q
What is IHT?
A
Tax paid on the estate of a deceased person.
Applies to (a) UK assets of UK resident taxpayers; and (b) worldwide assets of UK domiciled taxpayers.
IHT can also be triggered during a person’s lifetime.
2
Q
What relief under BRP for a transfer of business land or buildings ?
A
50% relief may be available on land or buildings used immediately before the transfer wholly or mainly for the purposes of a company controlled by the transferor
3
Q
A
4
Q
What are the current rates of IHT?
A
- Nil Rate Band: 0%,
- Lifetime Rate: 20%
- Death Rate: 40%
5
Q
What are the three events that trigger an IHT charge?
A
- Potentially Exempt Transfers (PET)
- Lifetime Chargeable Transfer (LCT)
- Death
6
Q
What is a Potentially Exempt Transfer (PET)?
A
- Lifetime transfers of value that could become chargeable if the transferor does not survive for seven years.
- It becomes fully exempt if the transferor survives 7 years.
7
Q
What is a Lifetime Chargeable Transfer (LCT)?
A
Lifetime transfers of value immediately chargeable.
8
Q
What happens when a person dies regarding IHT?
A
When a person dies, there is a deemed transfer of all the assets that they own per s.4 IHTA.
IHT is chargeable on this transfer of value.
9
Q
What is a transfer of value in the context of IHT?
A
A ‘transfer of value’ is a ‘disposition’ that results in an immediate decrease in the value of the estate.
10
Q
What does the term ‘Nil Rate Band’ refer to?
A
Individuals have a basic nil rate band of £325,000.
They can make £325,000 of chargeable transfers at a rate of 0% (i.e. no tax due).
11
Q
What is a transferable nil rate band (TNRB)?
A
A surviving spouse/civil partner can inherit the unused portion of their basis NRB.
12
Q
What is the Residence Nil Rate Band (RNRB)?
A
An additional NRB for individuals who die on or after 6 April 2017 if they leave their family home to a direct descendant.
The ‘Residence Nil Rate Band’ (RNRB) is £175,000.
£325,000 + £175,000 = £500,000 at 0%
13
Q
What are the conditions for a PET to become chargeable?
A
If the transferor doesn’t survive for 7 years after the transfer, it becomes chargeable alongside the death estate.
14
Q
What are the tax implications of Lifetime Chargeable Transfers (LCT)?
A
All lifetime transfers of value into a trust will give rise to LCT payable on the chargeable value at a rate of 20%.
If the transferor dies within 7 years, the LCT will be reassessed at the death rate of 40%.
Transfer into trust > IHT 20% > Die within 7 years > reassessed at 40%
15
Q
What does ‘cumulation’ mean in the context of IHT?
A
Cumulation prevents reduction of IHT by making a series of separate dispositions and means HMRC considers all chargeable transfers made in seven years prior to the transfer being taxed.
16
Q
What is the cumulative total and what impact does it have on the NRB?
A
The combined figure (cumulative total) of total chargeable value of all transfers made in the previous 7 years.
The cumulative total is deducted from the NRB to provide the available NRB
For example, A made a PET of 50k in 2020. A PET of 100k in 2021. The cumulative total is £150,000. A dies in 2022. His NRB is reduced (£325,000 - £150,000) to £175,000 @ 0%.
17
Q
How do we calculate the available NRB?
A
Full NRB - Cumulative Total
= Available NRB
18
Q
What percentage is the NRB taxed at?
A
0%
19
Q
When can a spouse take advanatge of the TNRB - unused portion of the deceased basic NRB?
A
- If a married individual dies, and some/all of their NRB is unused, the spouse can claim an increase in the survivor’s NRB equal to the unused percentage of spouse’s NRB.
- TNRB is only available after the surviving spouse dies. It can’t be claimed for a LCT chargeable lifetime transfer
20
Q
What if the deceased had multiple spouses? How much TNRB can they claim?
A
Individuals who survive multiple spouses can claim TNRB in respect of all spouses subject to a cap of 100% full NRB being transferred.
In other words, the maximum would be his own £325,000 + a combination of NRB from spouses up to £325,000 = £650,000
21
Q
What is Residence Nil Rate Band (RNRB)?
A
RNRB is an additional nil rate band. It applies if the following are satisfied:
- The deceased died on or after 6 April 2017
- Their death estate **included a qualifying residential interest **
- The QRI was **‘closely inherited’ by a ‘direct descended’ **
22
Q
What is the RNRB amount?
A
- Full RNRB: £175,000
- If the deceased share of the property is less than £175k, it’s capped at the value of their interest.
- Tapered withdrawal of RNRB for estates with a net value of more than £2 million. Reduced £1 for every £2 above £2 million.
- **No RNRB for net estates with £2,350,000 or more. **
23
Q
What is a Qualifying Residential Interest for RNRB?
A
- Property which the deceased lived in
- Property the deceased did not live in, but intended to in due course.
- It does not include rental investments which the deceased never lived in.
24
Q
For RNRB, when ios a QRI closely inherited?
A
A QRI must be closely inherited by a direct descendant.
- Children
- Grandchildren
- Great-Grandchildren
- Other lineal descendants
- Spouse/Civil Partner of lineal descendants
- Widow or widower of anyone above (I - V) who pre-deceased the deceased and does not re-marry before deceased has died
- Adopted children, step children if their parent was married to the deceased (foster children count too)
A beneficiary with a contingent interest does not ‘closely inherit’ as they are not receiving absolute.
25
Can you transfer the RNRB?
* **Yes**. A transferred RNRB can only be used if the surviving spouse leaves a QRI to a direct descendant.
* The maximum is capped at £175,000
* There is a tapered withdrawal for net estates worth more than £2 million. The RNRB is reduced £1 every £2 in excess of £2m, and no RNRB can be claimed for estates worth £2.7m or more.
| This is a TRNRB
26
What is the maximum combined total value a spouse can have when considering NRB, TNRB, RNRB, TRNRB?
* Full own NRB (£325,000)
* RNRB (£175,000)
* Transfered NRB (£325,000)
* Transferred RNRB (£175,000)
MAXIMIM: £1,000,000
27
What is the process for calculating IHT when someone dies?
1. Calculate cumulative total
2. Identify death estate
3. Value the taxable estate
4. Deduct debts
5. Deduct exemptions and relief
6. Apply RNRB
7. Apply basic NRB
8. Calculate tax.
28
29
What is stage 1 for calculating the IHT death estate?
**Calculate the Cumulative Total**
* Add up the value of all chargeable transfers in the 7 years prior to death.
* Reduce the NRB available accordingly
30
What is stage 2 for calculating the IHT death estate?
Identify the Death Estate.
All property to which the deceased was beneficially entitled at the date of death is **included** for IHT:
* Jointly owned property
* Property Subject to Reservation
* Lifetime gifts made on condition of death
* Statutory Nominations
* Interests in Possession
REMEMBER, the following are **excluded**:
* Life interest trust
* Discretionary Trusts
* Insurance Policy in Trust
* Discretionary Lump Sum Pension Death Benefits
31
What happens to jointly owned property for IHT purposes?
| Stage 2, Death Estate
* If owned as tenants in common, the **share passes into the deceased's estate** for tax and distribution purposes.
* For an owner as joint tenants, for IHT, there is a deemed severance of the joint tenancy so **the ‘share’ is taxable**.
32
What happens if a person reserves the benefit of an asset given away?
| Stage 2, Death Estate
The value of the asset at the date of death will be included in the IHT estate when they die at the date of death value.
*For example, parents give a holiday cottage to their children with the benefits of using it - this is included for IHT purposes.*
33
What is the treatment of statutory nominations in IHT?
| Stage 2, Death Estate
Statutory nominations do form part of the IHT estate on death, but not the distribution estate.
e.g. monies for the friendly society, industrial society or provident society accounts. The amount must not exceed £5000 in each account.
34
What are interest in possession trusts for IHT?
| Stage 2, Death Estate
* Interest in possession trusts would arise in the following way "A was a life tenant of a trust created in 2004... the capital value was £150,00)
* If they are created pre-22 March 2006 they are included in the life tenant’s taxable estate.
* If they are created post-22 March 2006 it depends..
(a) Created following someones death (e.g. by will) - value is included in taxable deasth estate
(b) If created inter vivo, not included in taxable estate
35
What are excluded from the taxable estate?
| Stage 2, Death Estate
* Life Interest Trusts (beneficiary only receives capital when life tenant dies)
* Discretionary trusts (because beneficiaries have no interest since they only hope to receive)
* Insurance Policy in Trust
*
* Discretionary Lump Sum Pension Death Benefits
36
What is stage 3 for calculating the IHT death estate?
Value the taxable Estate
37
What is the rule for valuing the taxable estate at death?
| Stage 3, Death Estate
Assets are valued at **market value at the date of death**, with specific rules for quoted shares and jointly owned land.
38
How are quoted shares valued?
| Stage 3, Death Estate
* Taking the lower of two prices on the Stock Exchange Daily List
* Add 25% of the difference between higher and lower value.
39
How is jointly owned land valued?
| Stage 3, Death Estate
Where land is co-owned, **the value of the deceased’s share is reduced by 10%**.
This does *not* apply where the co-owners are married.
40
What is stage 4 for calculating the IHT death estate?
Deduct debts and Liabilities
41
What is deducted from the taxable estate when calculating IHT?
| Stage 4, Death Estate
* Deduct the deceased's debts/liabilities due at the date of death (e.g. credit card outstanding)
* Deduct reasonable funeral expenses, and costs of tombstones.
* Other post-death expenses are payable from estate assets and cannot be deducted from value of IHT estate.
42
What is stage 5 for calculating the IHT death estate?
Deduct Exemptions and Relief
43
What exemptions or reliefs can be deducted from the estate?
| Stage 5, Death Estate
* Spouse Exemption
* Charity Exemption
* Business Property Relief
* Agricultural Property Relief.
44
What is stage 6 for calculating the IHT death estate?
Establish RNRB
1. Establish the value of the residence NRB available. This can include any available transferred RNRB.
2. Apply a rate of 0% to the value of the taxable estate up to the total RNRB amount
45
What is stage 7 for calculating the IHT death estate?
1. Establish the value of the NRB and transferred NRB. Reduce the total NRB by the value of the cumulative total
3. Apply a rate of 0% to the value of the remaining taxable estate up to the total NRB amount
5. **Apply the death rate of 40% to the rest to establish IHT due**
46
What is the basic nil rate band (NRB)?
The basic NRB allows the first £325,000 of a transfer to be taxed at 0%.
47
What is the tapering effect of RNRB?
There is a tapered withdrawal of RNRB for estates with a net value of more than £2 million, reducing £1 for every £2 over that threshold.
48
What are the stages of calculating IHT due on an immediately chargeable lifetime transfer (LCT)?
1. Calculate Cumulative total
2. Identify Value Transferred
3. Apply Exemptions & Reliefs
4. Apply basic NRB and calculate tax
5. Apply Taper Relief
6. Give credit for tax Paid in Lifetime.
49
How are lifetime transfers valued for an LCT?
| Stage 2, Lifetime Transfer
* The value is assessed by reference to the **loss in value to the donor at the date of transfer**.
* For cash sums, this will be the same as the gain to the donee.
50
What is stage 3 for lifetime transfers?
Apply any lifetime transfer exemptions
spouse, charity, family maintenance, annual or small gifts or marriage exemptions)
Apply reliefs (normal expenditure, business property, agricultural property or taper relied)
After exemptions, you will have a figure for the **chargeable value of the transfer**
51
What is the annual exemption?
* Transfers of up to £3,000 per tax year are not chargeable.
* Once the AE for the current year has been used, any part of the previous years AE unused can be claimed.
* Total £6,000
Always consider when taxing LCTs!
52
What is stage 4 when calculating lHT on lifetime transfers?
Apply NRB and Calculate Tac
1. Establish the value of the NRB
3. Reduce the total NRB by the value of the calmative total (calculated in step A)
5. Apply a rate of 0% to the value of the remaining taxable estate up to the total NRB amount
7. Apply the relevant rate to the rest to establish IHT due:
**LCT: 20 %**
Failed PETs and Re-Assessed LCTs: 40 %
53
What is stage 5 when calculating IHT for LCT?
| This only matters when reassessing an LCT due to death!
PETs or LCTs made in the 7 years before death must be reassessed to IHT separate to the calculation of IHT on death estate by applying** taper relief to transfers made 3-7 years before the death**.
Date of transfer > Amount IHT Payable
0 -3 Years - 100 % Payable (No Taper)
3 - 4 Years - 80 % Payable (No Taper)
4 - 5 Years - 60 % Payable (No Taper)
5 - 6 Years - 40 % Payable (No Taper)
6 - 7 Years - 20 % Payable (No Taper)
54
What is stage 6 when calculating IHT for an LCT?
| This only matters when reassessing an LCT due to death!
Where an LCT is being re-assessed at the death rate, we must **consider any tax paid at lifetime rate** by deducting the IHT paid previously from that due as a result of death.
For example, if A settles 400,000 on trust (lCT) and pays £13,800 tax. He dies 3 years later. The £13,800 must be deducted from the IHT payable on the LCT at death.
55
Who is liable for IHT of an LCT during lifetime?
The person whom assets vest (donee) is usually liable to pay IHT. For an LCT that will be the trustees.
If the trustees do not pay the tax, the donor becomes liable.
However, the donor can elect /choose to pay the tax.
56
What is the role of personal representatives (PRs) regarding tax liability?
PRs must retain sufficient funds for IHT and are responsible for paying IHT on the free estate.
57
What is the effect of a failure to pay IHT by the donee?
If the donee fails to pay IHT within the deadline, the deceased’s personal representatives will become liable.
58
What happens to the IHT if the transferor dies within 7 years of a PET?
The PET will be reassessed to IHT at the death rate.
59
What is the impact of giving credit for tax paid in lifetime?
Where an LCT is being re-assessed at the death rate, previously paid IHT can be deducted from the tax due.
60
What is the purpose of the annual exemption in lifetime transfers?
Transfers of up to £3,000 per tax year are not chargeable for IHT.
61
What is the Annual Exemption (s.19 IHTA)?
| Lifetime Only
* Individuals can make gifts of up to £3,000 each tax year free from IHT.
* Once the AE for the current tax year is used, the transferor can look back one previous tax year (no further) and use any part of the AE from then (Tax Year: April 6 - April 5). A maximum of 2x AE (£6,000) may be available.
* **It only applies to lifetime transfers!**
62
What does Family Maintenance (s.11 IHTA) cover?
| Lifetime Only
Maintenance payments are not treated as transfers for IHT if made **to a spouse, a minor child for maintenance, education, or training**, or a **dependent relative** for their care.
* **It only applies to lifetime transfers!**
63
What is the Small Gifts Allowance (s.20 IHTA)?
| Lifetime Only
Small gifts of up to £250 per recipient can be made tax-free.
A transferor can make multiple gifts of up to £250 to as many different people as they like.
The allowance is not available if combined with other exemptions such as AE.
| Lifetime Only
64
What is the Marriage Exemption (s.22 IHTA)?
| Lifetime Only
* A gift given in consideration of a marriage is exempt up to £5,000 if made by parents of one of the parties
* £2,500 if made by one party to the marriage to the other,
* £2,500 if made by remoter ancestors (e.g. grandparent)
* £1,000 in other cases.
Each parent (4) could give £5,000 and **together claim relief of £20,000. **
Marriage exemption and Annual Exemption can both be claimed for the same gift.
| Lifetime Only
65
What is Normal Expenditure out of Income (s.21 IHTA)?
| Lifetime Only
A transfer is exempt if it is **made from the donor’s income, as part of a normal pattern of giving,** and does not affect the donor’s standard of living. There is no upper limit to this exemption.
| Lifetime Only
66
What is Taper Relief?
| Lifetime Only
Taper relief reduces the amount of IHT payable if a lifetime transfer was made 3-7 years prior to the transferor’s death and IHT is payable in respect of the transfer.
It takes effect as a proportionate reduction of the final tax bill (between 20 - 80% reduction)
| Lifetime Only
67
What is the Spouse Exemption?
| Applies to LCT and failed PETs
**Gifts between spouses during life and following death are exempt**, with no upper limit if both are domiciled in the UK.
Unmarried couples cannot claim spouse exemption.
| Applies to LCT and failed PETs
68
What is the Charity Exemption?
| Applies to LCT and failed PETs
All transfers to registered charities during life and after death are **exempt**.
The gift must be immediate and not in remainder.
**A reduced IHT rate (36% instead of 40%) may apply if at least 10% of the estate is left to charity.**
| Applies to LCT and failed PETs
69
What is the Gift to Political Parties exemption?
| Applies to LCT and failed PETs
Gifts to political parties are exempt from IHT if the party had at least 2 elected MPs or at least 1 elected MP and 150,000 votes given to candidates representing the party in the last general election.
| Applies to LCT and failed PETs
70
What is the Gift of Land to Housing Associations exemption?
| Applies to LCT and failed PETs
Gifts of land are exempt from IHT if made to a housing association or a registered social landlord.
| Applies to LCT and failed PETs
71
What are Gifts for National Purposes exempt from IHT?
| Applies to LCT and failed PETs
Gifts made for national purposes are exempt, including those for museums and galleries for specified purposes for public benefit.
| Applies to LCT and failed PETs
72
What is the Gift to Heritage Maintenance exemption?
| Applies to LCT and failed PETs
Gifts to trusts that maintain historic buildings or land of scenic, scientific, or historical interest do not incur IHT, nor is the fund required to pay IHT.
| Applies to LCT and failed PETs
73
What are Gifts to Employee Benefit Trusts (EBTs)?
| Applies to LCT and failed PETs
EBTs are tax-efficient ways for remunerating employees and are complex and not assessed for IHT.
| Applies to LCT and failed PETs
74
What is Business Property Relief (BPR) (s.103-114 IHTA)?
| Applies to LCT and failed PETs
BPR reduces IHT payable on qualifying business property:
* Unquoted Shares (ltd) - 100 % Relief
* Quoted Shares (plc) - 50 % Relief
* Business/Interest in Business - 100%
* Assets used for business - 50 % Relief
The transferor must have owned the business assets continuously for at least 2 years immediately prior to transfer.
| Applies to LCT and failed PETs
75
What is Agricultural Property Relief (APR) (s.115-124 IHTA)?
| Applies to LCT and failed PETs
* Agricultural land and buildings **used for agricultural activity** qualify for APR.
* Farmhouses and cottages may qualify if they are of a character appropriate associated with the agricultural land and have been occupied for the purpose of agriculture (e.g. a farmer and surviving wife)
* Occupied for agricultural purposes by the transferor throughout the two years immediately before transfer
**100 % rate of relief** is available if the transferor was the owner occupier; or the property was let on a tenancy beginning on or after 1st September 1995
50 % relief in respect of tenancies created before September 1995
| Applies to LCT and failed PETs
76
What is Woodland Relief (s.125 IHTA)?
| Death Only
Gifts of woodland following death may qualify for relief **if the deceased owned it for at least 5 years before dying**. If inherited, there's no ownership period required.
Woodland relief is a deferral of IHT
| Death Only
77
What is Quick Succession Relief (s.141 IHTA)?
| Death Only
QSR applies when a person dies, and **their estate includes assets received by gift or inheritance** in the 5 years before death, which were subject to an IHT charge when transferred.
QSR reduces the IHT payable on that persons estate to the extent it is attributable to assets previously charged.
| Death Only
## Footnote
Someone dies and then dies again within 5 years!
78
What is the duty of the Personal Representatives (PRs) regarding IHT?
PRs must deliver an account to HMRC regarding the deceased’s estate and pay any IHT due.
79
What should PRs include in their account to HMRC?
The account should specify all property in the deceased’s taxable estate immediately before death, the value of each item at the date of death, and the exemptions and reliefs that apply.
80
What is IHT Form 400?
Form IHT 400 is used to report assets and liabilities unless the estate is excepted, in which case less complex information is provided.
81
What are the deadlines for submitting the IHT account?
The IHT account must be submitted within **12 months from the end of the month in which the death occurred.**
82
What are the deadlines for paying IHT?
IHT must be paid within **6 months from the end of the month in which the death occurred**; otherwise, interest becomes payable.
83
When can a PR not submit IHT 400 but simply provide the information as part of the grant of representation?
1. Low Value Excepted Estate: an estate where no IHT is payable because the gross value of the estate is below the NRB
2. Exempt Excepted Estate: the gross value of the estate is no more than £3 million, but no IHT is payable because, after debts are deducted and spouse and/or charity exemption applied, the net value of the estate is below the NRB.
* In addition to either (1) or (2), the one of the following must be satisifed
- No gift with reservation of benedfit
- Foreign asset doesn't exceed 100k
- Only 1 trust not exceeding 250k
- Specified transfers not exceeding 250k
- No claim made for RNRB
84
85
What are the instalment options for paying IHT?
IHT due in respect of certain assets may be paid in 10 equal annual instalments, with interest charged on remaining amounts.
86
What is the Direct Payment Scheme?
The Direct Payment Scheme allows banks or building societies to make a direct payment from the deceased’s account to HMRC prior to the grant being issued.
87
When considering whether an estate is exempt from submitting IHT400 Accounts, can an estate with UK real property be excepted as a foreign domiciled estate?
No. If other categories of assets are held in the UK, such as interest in real property, the estate is not excepted as a foreign domiciled estate.
88
When must IHT be paid by?
Think....
(a) Pre or Post Grant?
(b) What is the deadline?
IHT must be paid by the executor **before the grant is issued**.
The executor should ensure IHT due is paid *either* before the grant is issued, or by the end of the 6 months after the death - whichever is earliest.
89
If further assets are discovered after applying for the grant of probate (and having paid the IHT due) what action should be taken?
The executor must submit (and be signed by them) **Form C4** showing the new assets and pay the additional IHT due
90
What one type of trust interest is included in a taxable estate when considering IHT upon death?
Lifetime Interest
