Wills - Tax

Question 1

What is a CLT and how does it affect the NRB?

Answer 1

A CLT is a gift to a discretionary/interest in possession trust or to a company.

When calculating remaining NRB for the CLT, you deduct CLTs made within the 7 years before the gift.

Question 2

What is the tax rate for a CLT?

Answer 2

For trustees: 20%
For donor: 25% (primary liability)

Question 3

When is IHT due for a CLT?

Answer 3

The later of 6 months from the end of the month in which the CLT was made and 30 April after the tax year it was made.

Question 4

Why is additional tax sometimes payable on a CLT?

Answer 4

If the donor dies within 7 years of making the gift, the rate is 40% - taper relief is available and there is credit for lifetime tax paid (difference between death tax and lifetime tax is chargeable).

Question 5

When is IHT due for additional tax for CLT and for PETs?

Answer 5

6 months from the end of the month of the death.

Question 6

What is the taper relief for PETs?

Answer 6

The gift is not exempt if the donor dies within 7 years of making it. Any tax due is payable by the recipient. Taper relief applies:

0-3 years: 0%
3-4 years: 20%
4-5 years: 40%
5-6 years: 60%
6-7 years: 80%

Question 7

What is the effect of gifting part of the estate to charity?

Answer 7

If 10% or more of the deceased’s net estate (after reliefs and NRB) is left to a charity, the taxable estate is charged at 36%.

Question 8

When are lifetime gifts to spouses exempt from IHT?

Answer 8

All gifts to spouses/civil partners are exempt from IHT, but if they are non-UK domiciled, only the first £325,000 is exempt.

Question 9

Which other lifetime gifts are exempt from IHT?

Answer 9

• Gifts to UK/EEA charities.
• Lifetime gifts of up to £250 to any donee in a tax year (all or nothing)
• Gifts on marriage.
• Habitual or regular gift, so long as the donor is let with sufficient income to maintain their normal standard of living.

Question 10

What are the maximum amounts that can be gifted on marriage>

Answer 10

Parent: £5,000
Grandparent: £2,500
Bride/groom: £2,500
All others: £1,000

Question 11

What is the annual exemption for IHT and can it be carried forward?

Answer 11

£3,000 applying in chronological order. Unused annual exemptions can be carried forward for one tax year.

Question 12

What is the transferable NRB?

Answer 12

Any unused portion of NRB can be used by spouses, up to an additional 100%.

Question 13

What is the residence NRB?

Answer 13

Up to £175,000 if the deceased’s private residence is left to lineal descendants or their spouses. It tapers at £1 for every £2 above £2 million.

Also transferable to spouses.

Question 14

What is business relief?

Answer 14

Reduces the value of business property given as a lifetime gift to a trust or at death. It is given before any annual exemption. Requirements:
- The business must be trading.
- The donor must have owned the property for at least 2 years, unless replacing it within 3 years or inheriting it from a spouse.

Question 15

When does 100% business relief apply?

Answer 15

If gifting:
- Sole-trade business or partnership interest.
- Shares in an unlisted trading company.

Question 16

When does 50% business relief apply?

Answer 16

If gifting:
- Shares in a quoted trading company if the donor has >50% of the ordinary shares.
- Land/buildings/machinery used by a partnership of which they are a member, or a company they control.

Question 17

What is agricultural relief?

Answer 17

100% relief for land and buildings used for the purposes of agriculture by farmers or landowners letting to farmers. The property must have been occupied by the transferor for 2yrs or tenanted for 7.

Does not include grazing horses or land used for fishing, shooting etc.

Question 18

What is quick succession relief?

Answer 18

An individual’s estate is increased by a chargeable transfer made to them in the 5 years before death. The relief decreases by 20% each year, and need not be owned by the deceased at the date of death.

Question 19

What are the 3 post-mortem reliefs?

Answer 19

1. Quoted shares: If the PRs sell quoted shares within 12 months of the death, a post-mortem claim will usually generate a repayment of IHT.
2. Land and buildings: Relief if land or buildings are sold within 3 years of the death - loss is deducted from the value of the estate for IHT purposes.
3. Woodlands relief: If trees/underwood are growing and the deceased was beneficially entitled to the land for 5 years before the death, or had inherited it, the value of the woodlands is excluded from the estate.

Question 20

What is the gift with reservation of benefit rule?

Answer 20

If a donor gives away an asset but continues to derive a benefit, it is treated as forming part of the donor’s estate at the date of death and the donee is primarily liable to pay (can pursue PRs if 12 months pass).

Question 21

How can the gift with reservation of benefit rule be avoided?

Answer 21

1. If the donor pays market rent.
2. If they release the reservation before they die (treated as a PET - will not be double taxed).
3. Does not apply if a cash gift is made from the proceeds of a house and this is used to purchase a house and the donee lives in it rent-free (income tax charge applies instead).

Question 22

How does the PR deal with income and capital gains taxes owed by the deceased?

Answer 22

The PRs must complete and submit the deceased’s income tax return covering 6 April-date of death. They must also settle any income tax owed.

Any CGT due in the year of death is a liability of the estate for IHT and should be included in the IHT return prepared by the PRs.

Question 23

What is the PR’s liability to income tax and CGT?

Answer 23

PRs submit tax returns detailing income and gains accruing to them during the period of administration.

Question 24

What must the PRs do if assets within the death estate produce income?

Answer 24

As the income legally belongs to the PRs, they must pay income tax on it:
- Non-savings income/interest: 20%
- Dividends: 8.75%

Question 25

What must the PRs do if they sell assets and make a profit?

Answer 25

They will have a CGT liability of 20% for general gains and 28% for residential property. When the beneficiary disposes of it, the acquisition cost is the probate value.