Wills (Tax Planning)

Question 1

What is tax planning?

Answer 1

Tax planning is the efficient and lawful arrangement of a client’s affairs to minimize tax liability.

Question 2

What is aggressive tax avoidance?

Answer 2

Aggressive tax avoidance is a form of lawful tax avoidance that involves entering complex, artificial arrangements to reduce tax liability, often exploiting loopholes.

Question 3

What is tax evasion?

Answer 3

Tax evasion is the unlawful withholding of information about assets or income.

Question 4

When could avoidance occur with loan deductions in IHT?

Answer 4

Avoidance may occur when calculating an estate’s chargeable value for IHT.

Question 5

How are loans for assets attracting BPR, AR, or WR treated for IHT purposes?

In other words, how do anti-avoidance rules restrict deductions?

Answer 5

The costs of the loan must first be set against the value of the assets reducing the value of assets which attract relief.

For example, A takes out a loan worth £75,000 to buy shares worth £100,000 and qualifies for 100% BPR. When applying the BP Relief, £75,000 rather than £100,000 is deducted from there taxable estate.

Question 6

What are the rules for unpaid loans in IHT - how do anti-avoidance rules restrict deductions?

Answer 6

Unpaid loans are only deducted from the estate value if repaid from the estate.

Debts to family, trusts, or companies are deductible only if repaid.

For example, A lends B £200,000. B dies and leaves the estate to C (£600,000). If the loan is unpaid, the taxable estate is worth £600,000. Had loan been repaid, the taxable value would be £400,000.

Question 7

What do Gifts with Reservation of Benefit (GROB) rules do?

Answer 7

GROB rules prevent manipulating PET rules by retaining an interest in property gifted away.

Question 8

When do GROB rules apply?

Answer 8

GROB applies if the donee either..

(a) Does not assume bona fide possession at or before the start of the 7 year period; or

(b) At any time during the 7 year period. the property is not enjoyed for the entire exclusion, or virtually entire exclusion, of the donor

Question 9

What is bona fide possession in GROB?

Answer 9

Bona fide possession means the donee must have a vested interest, enjoy actual possession, and assume possession at the start of the relevant period.

For example, if A transfers legal title to B of their home, but B allows A to live their rent free, GROB applies. However, if A pays market rent, B has bona fide possession.

Question 10

What happens if a benefit is reserved in GROB?

Answer 10

If the GROB subsists at death, the property is treated as part of the estate.

If the benefit ends before death, the PET is treated as occurring when the benefit ceased.

Question 11

What is the Pre-Owned Asset Charge (POAC)?

Answer 11

POAC is an income tax charge that prevents individuals from using assets they previously gave away or contributed to.

It applies to (i) Land; (ii) Chattels; and (iii) Intangible Property held in a Settlor-Interested Trust

Question 12

What is POAC for land?

Answer 12

POAC applies if an individual occupies land and meets disposal or contribution conditions

If POAC applies, the benefit the individual receives through their occupation is treated as taxable income - Usually income tax on the equivalent of the market rent they would have to pay to occupy

For example, A transfers legal title to her house to B. A continues to live with B. A will be taxed based on the market rent

Question 13

What is POAC for chattels?

Answer 13

For chattels, POAC applies if an individual has use of gifted items, with income tax calculated using the market value and an official interest rate.

For example, A gifts his shares to B. B sells the shares and buys a car. A uses the car every day to drive to work. Since the the car was acquired using the proceeds, A pays POAC calculated by reference to the rate of interest on the car’s market value.

Question 14

What is POAC for settlor-interested trusts?

Answer 14

POAC applies if the trust property

• Is, will or may become payable to or for the benefit of the settlor; and
• The trust property is intangible property settled into trust

Question 15

Which transactions are excluded from POAC?

Answer 15

Exclusions include…
* Transfers between spouses
* Dispositions for family maintenance
* Annual and small gift exemptions
* Arm’s length to unconnected persons
* Occupation 7 years after cash gift.

Question 16

What does the General Anti-Abuse Rule (GAAR) do?

Answer 16

GAAR penalizes aggressive tax avoidance by requiring adjustments to counteract abuse and imposing a 60% penalty of the counteracted amount.

Question 17

What is DOTAS?

Answer 17

DOTAS is a reporting regime helping HMRC monitor potential tax avoidance, including IHT, by requiring promoters and parties to disclose notifiable arrangements.

Question 18

What is the IHT hallmark under DOTAS?

Answer 18

To fall within the IHT hallmark, both need to be satisfied:

(a) The main purpose of the arrangement is to enable a person to obtain a specific advantage in respect of IHT

This includes….
* avoidance/reduction of IHT charges relating to trusts
* avoidance or reduction of charges arising under GROB rules
* reduction in value of an individuals estate which does not give rise to a chargeable transfer or PET.

(b) The arrangements involve one or more abnormal steps without which there would be not advantage.

Question 19

What is the objective of IHT planning?

Answer 19

The objective is to reduce IHT liability by minimizing the taxable estate, maintaining financial security, and providing for family after death.

Question 20

What should clients be advised when reducing IHT?

Answer 20

They should be advised of potential CGT charges, loss of asset access, and the impact of anti-avoidance legislation on certain actions.

Question 21

What is the Annual Exemption?

Answer 21

Allows individuals to make gifts up to £3,000 each tax year IHT-free, with unused amounts claimable from the previous year.

Question 22

What is the Family Maintenance exemption?

Answer 22

For transfers covering education or dependent family support, useful for high costs, with no upper limit.

Question 23

What is the small gifts allowance?

Answer 23

Allows small gifts up to £250 per recipient annually, exempt from IHT, not combinable with the Annual Exemption.

Question 24

What is the marriage exemption?

Answer 24

Tax-free wedding gifts up to £5,000 (parent), £2,500 (grandparent), or £1,000 (other relatives), combinable with the Annual Exemption.

Question 25

What is the normal expenditure out of income exemption?

Answer 25

Exemptions for regular payments from surplus income without impacting the donor’s standard of living, useful for high-income clients.

Question 26

What is the spouse exemption?

Answer 26

All transfers between spouses are fully exempt from IHT, providing opportunities for efficient asset allocation and potential CGT planning.

Question 27

What is the charity exemption?

Answer 27

All transfers to charity are IHT-exempt, with potential 36% IHT rate if 10% or more of the estate is donated.

Question 28

What are Business & Agricultural Property Reliefs (BPR and APR)?

Answer 28

Transfers of qualifying business/agricultural assets are exempt at 100% or 50%, depending on ownership period, often used to convert cash to exempt assets.

Question 29

Which assets are not subject to IHT?

Answer 29

Discretionary pension lump sums and life insurance policies in trust are exempt, with clients advised to establish these arrangements.

Question 30

What is the benefit of gifting to a spouse in a will?

Answer 30

Gifts to a spouse are IHT-exempt, reducing tax liability unless the estate would otherwise be non-taxable.

Question 31

What advice might benefit unmarried couples for IHT?

Answer 31

Marrying may allow use of spouse exemptions, but limitations apply if one partner is non-UK domiciled.

Question 32

What is the advantage of leaving assets to charity in a will?

Answer 32

Charitable gifts are IHT-exempt, with potential reduced IHT rate if 10%+ of the estate is left to charity.

Question 33

What are qualifying assets for APR/BPR?

Answer 33

Qualifying assets include business and agricultural property owned for at least two years, eligible for up to 100% relief.

Question 34

What are special gifts per s.39A IHTA?

Answer 34

BPR/APR may be wasted if qualifying assets are left to exempt beneficiaries, as the relief applies to assets, not the overall estate.

Question 35

What is the effect of gifting the residue in a will?

Answer 35

Leaving qualifying APR/BPR assets in the residue may waste relief, as it apportions benefits between taxable and exempt beneficiaries.

Question 36

How is IHT applied with a specific gift to an exempt beneficiary and residue to a chargeable beneficiary?

Answer 36

Only the residue is subject to IHT, paid from the residue.

Question 37

How is IHT applies when there is….

• Specific gift to exempt beneficiary
• Residue to chargeable beneficiary and exempt beneficiary

Answer 37

The exempt portion of the residue is untaxed

IHT is deducted from the chargeable portion.

Question 38

How is IHT applied with a specific gift to a chargeable beneficiary and residue to an exempt beneficiary?

Answer 38

The specific gift is subject to IHT, while the residue has no deductions.

For example, if £400,000 goes to a child, and the residue to the spouse, the child inherits £400,000 less the IHT due. The spouse receives residue without deductions.

Question 39

How is IHT applied with specific chargeable and exempt residuary beneficiaries?

Answer 39

The exempt portion of the residue pays no IHT, with the tax apportioned between the legacy and shareable residuary beneficiaries.

Question 40

How does drafting a tax-free specific gift affect IHT?

Answer 40

The chargeable beneficiary receives the full amount tax-free, with IHT paid from the remaining estate, impacting the exempt residuary share.

Question 41

When is the NRB (Nil Rate Band) used in IHT?

Answer 41

The NRB is used only if the estate is left to chargeable beneficiaries or partially to exempt and chargeable ones.

The NRB is used in full if the total value of gifts to non-exempt beneficiaries is greater than the NRB.

Question 42

What happens to the NRB the first of a married couple to die leaved everything to the survivor?

Answer 42

They avoid using their NRB.

Their NRB can be transferred to the survivor and claimed on their death.

Question 43

What if an unmarried couple with a large estate die? What happens re NRB on first and second death?

Answer 43

If both parties have estates large enough to attract IHT,** tax will be payable on the first and second deaths**.

E.g., A dies and gives everything to B. IHT payable on value of As estate. B dies, IHT is payable on the value of Bs estate.

Question 44

If the client wishes to give away the NRB to a non-exempt beneficiary, what formula should be used?

Answer 44

“I give an amount equal to the value of my nil rate band available on the date I die to X …”

Question 45

Why should a testator considering making a gift to a discretionary trust?

How does it work?

Answer 45

• IHT is charged at the point of creation
• The beneficiaries have no beneficial interest as an individual since it is discretionary > No IHT Payable by the Individual Discretionary Beneficiary
• However, note that no exemption (spousal exemption) can apply and RNRB cannot be claimed

Question 46

How does a 2 Year Discretionary Trust work?

Answer 46

They are drafted to last only 2 years following testators death.

By virtue of s.144 ITA, distributions are deemed to have taken place under the deceaseds will for iHT purposes and not by the trustees.

This means spouse/charity exemptions can apply, and a refund of all IHT paid following death can be claimed.

Question 47

Why should a testator considering creating a life interest trust by will?

How does it work?

Answer 47

• The Settlor Estate pay IHT on death
• The gift to the ‘life interest’ recipeint is included in the taxable estate. However, exemptions such as Spousal Exemptions apply (contrary to DTs)
• The Remainder interest is not included in the taxable estate - IHT Tax Free

For example, a life interest trust, works as follows - spouse life interest (no IHT due to spousal exemption), and upon their death the child (remainder interest) recieves the money tax free due to the remainder itnerest being tax free.