Wills WS3- Inheritance Tax

Question 1

What is the IHT rate for a lifetime transfer?

Answer 1

20%

Question 2

What happens if someone dies within 7 years of a lifetime transfer?

Answer 2

The lifetime transfer is reassessed to tax using the NRB at the date of death

Question 3

How is the cumulative total calculated for and LCT or PET?

Answer 3

The cumulative total is calculated by adding up the value of all chargeable transfers made in the 7 years prior to the TRANSFER

Question 4

What value is used to work out the disposal value of a LCT?

Answer 4

It is the loss of value to the donor’s estate

NOTE: important for things like sets where the reduction in value of the donor’s estate by gifting a part of a set may be greater than the value received by the donee on receiving a part of a set.

Question 5

What are the exemptions and reliefs that may apply to a LCT?

Answer 5

• Spouse
• Charity
• Family maintenance
• Annual exemption
• Small gifts allowance
• Normal expenditure from income
• Marriage exemption
• Business property relief
• Agricultural property relief
• Taper relief

Question 6

What is the Annual Exemption for LCT?

Answer 6

£3,000 per year. Can include £3,000 from the previous year if not used (maximum of £6000).

NOTE: this is the last relief that applies.

NOTE: only applies to lifetime transfers, not on death

Question 7

Does the “Residence Nil Rate Band” apply to LCTs?

Answer 7

No. Just transfer of death.

Question 8

What is the value of the NRB applicable to a LTC?

Answer 8

The NRB at the date of transfer

Question 9

What is the NRB that applies to a failed PET of re-assessed LCT?

Answer 9

The NRB amount as the date of death

Question 10

What is the percentage 40% IHT due for a failed PET (taper)?

Answer 10

0-3 years before death = 100%
3-4 years before death = 80%
4-5 years before death = 60%
5-6 years before death = 40%
6-7 years before death = 20%

NOTE: work out tax first then x by above

Question 11

Are PETs that have yet to failed taken into account when considering the cumulative total for LCTs?

Answer 11

No.

Question 12

Who is liable to pay IHT on LCT during the donor’s lifetime?

Answer 12

The donee (i.e. the trust out of the settled assets).

However, if the donees doesn’t pay, the donor becomes liable or he may elect to be liable (this requires grossing up as the funds to pay the IHT have also left his estate).

Question 13

Who is liable to pay IHT on LCT and failed PETs after the donor’s death and what happens if they don’t pay?

Answer 13

The recipient (donee) is.

If the donee doesn’t pay by the deadline (12 months) the PRs become liable

Question 14

Will the IHT estate always be the same as the estate that passes to the PRs (the free estate)?

Answer 14

No. Some assets may pass outside the succession estate such as:
- joint tenant property
- Gifts with reservation of benefit

Question 15

Who is liable to pay IHT on the “Free Estate”?

Answer 15

The PRs - normally from the residue unless a contrary intention appears in the will.

Question 16

Who is liable to pay IHT on the “Succession estate” that is outside of the “Free Estate”?

Answer 16

The IHT follows the asset

Question 17

What IHT exemptions only apply to LCTs (I.e. don’t apply on death)

Answer 17

• Annual exemption
• Family Maintenance exemption
• Small gifts exemption
• Marriage exemption
• Normal expenditure out of income
• Taper relief

Question 18

What is the annual exemption for LCTs?

Answer 18

£3,000 + £3,000 from previous year if not used.

Question 19

Who does the family maintenance exemption for IHT apply to?

Answer 19

• Spouse (or former spouse if part of a divorce settlement). Must both be UK dom
• minor child of either party to a marriage.
• child over 18 in full time education or training
• a dependant relative to make reasonable provision for their care.

Question 20

What are the rules for the small gifts exemption for IHT?

Answer 20

up to £250 per recipient per year (no limit to number of recipients).
NOTE: small gifts allowance cannot be used in combination with any other exemption.

NOTE: if gifts to the person exceed £250, the exemption does not apply at all.

Question 21

What are the rules for the marriage exemption for IHT?

Answer 21

A gift to a party to marriage is exempt up to:
- £5,000 if made by a parent of one of the parties,
- £2,500 if made by one party of the marriage to the other
- £2,500 if made by a remoter ancestor (grandparent and up)
- £1,000 in any other case.

NOTE: the exemption is per DONOR and PER MARRIAGE (so you can’t gift £5k to one party to the marriage and £1k to the other and claim marriage exemption on both payments).

Question 22

Can the marriage exemption and the annual exemption for IHT be used for the same gift?

Answer 22

Yes.

Question 23

What are the rules for the “normal expenditure out of income” exemption for IHT?

Answer 23

Exempt if made:
- from donor’s income
- as part of a normal/regular pattern of giving, and
- does not affect the donor’s standard of living.
THERE IS NO UPPER LIMIT TO THIS EXEMPTION.

Question 24

What are the effects of using the Charity exemption for IHT?

Answer 24

Gifts are fully exempt without limit
If a person leaves 10% or more to a charity, a reduced rate of 36% will apply to the rest of the estate.

Question 25

Which assets are not subject to IHT on LCTs?

Answer 25

• Discretionary pension lump sum payments
• Life insurance policies written into trust

NOTE: premiums on Life insurance policies are often covered by the normal expenditure from income exemption.

Question 26

Which assets may benefit most from being given away as a PET?

Answer 26

IHT on a PET will be charged by reference to the value at the date of the PET. Therefore, if assets are likely to rise in value, it may be worth making a PET. But consider CGT and whether the gift could be made over 2 years.

Question 27

There are two separate types of lifetime transfers – what are they?

Answer 27

*Lifetime chargeable transfer (LCT)
*Potentially exempt transfer (PET)

Question 28

On what 3 separate occasions is IHT payable?

Answer 28

1) At the time a transfer is made during a person’s lifetime (lifetime transfer)
2) On the same lifetime transfer, if the transferor dies within 7 years of making the transfer (potentially exempt transfers)
3) On the transferor’s estate after the transferor has died (death)

Question 29

What is a lifetime chargeable transfer (LCT)?

Answer 29

*Made while a transfeor is still alive.

*Made to any natural person or legal entity which is NOT an individual or NOT a trust in favour of a disabled person (e.g., company, discretionary trust or incorporated association).

*A transfer of value on or after 22 March 2006.

*Charged at 0% if it falls within the nil rate band.

*If not within the nil rate band (0%) - charged at lifetime rate (20%) when made.

*If transferor dies within 7 years of transfer, charged second time at 40% (death rate), if transfer survives 7 years, no further taxation.

*Subject to taper relief if transferor dies between 3 and 7 years after making the transfer.

Question 30

What is a potentially exempt transfer (PET)? ‘Wait and see’ transfer..

Answer 30

*Made while transferor is still alive.

*Made only to an individual, or to trustees of either a bare trust in favour of an individual, or a trust in favour of a disabled person.

*Transfer of value.

*Not charged to tax at all if the transferor survives for 7 years after transfer is made.

*Is charged to tax at death rate (40%) if transferor fails to survive for 7 years.

*Subject to taper relief if transferor dies between 3 and 7 years after making transfer.

Question 31

What is a ‘transfer for value’?

Answer 31

In order for the rules to apply the transfer must be a transfer for value.
*Gift of money-will be the amount of money transferred, i.e. if I give £10,000 the transfer for value is £10,000

*Gift of property- the value of property is determined by amount the taxable estate is reduced by disposition. So for example, if I gift a £5000 diamond ring, the value of the transfer is the market value of the ring.

Question 32

What are the exceptions to a gift of a transfer for value’? What is not a ‘transfer for value’?

Answer 32

*If the transfer of a gift is made to fulfil an obligation, e.g. to a spouse, child, dependent, relative

*Transfer has sold the item on an open market value, without knowing they were doing so ‘accidental bad bargain’ is not a transfer for value.

Question 33

How is the estate reduced by undervalued gifts of transfers for value?

Answer 33

Sale at an undervalue-if transferor gives a gift worth £25,000 gift for a cheaper value of £5,000

1) Then the assessed on value estate is reduced by the actual value of the gift, i.e. £25,000 not value sold £5,000

This is to avoid people getting around the rules and selling it for cheap to another person. But the value of the item will still be the actual or ‘market value’

Question 34

What is the tax for PETs?

Answer 34

*0% - if they do not die within 7 years it becomes fully exempt

*40% - if they do die within 7 years, PET fails (subject to any tapering relief of 20-80% between years 3-7)