Workbook 4 IHT residence and domicile

Question 1

IHT applies to

Answer 1

• All property anywhere for a UK domiciled person.
• Only UK property for a non UK domiciled person.
• Deemed domiciled if resident in UK for 15 of last 20 years previously.
• Gilts are not liable to IHT if the donor is not ordinarily resident, regardless of domicile.
• Interest free loan is not a transfer if payable on demand or at death.
• Charged to gifts which are not exempt.
• No IHT on commercial transactions where payment is fully received.
• No IHT is paid on a ‘bad bargain’, i.e. no intent to confer gratuitous benefit, at arm’s length between unconnected parties.

Question 2

If transferor UK domiciled but spouse is not

Answer 2

exemption limited to £325,000 value

Question 3

PETs

Answer 3

 Donee is liable for payment of the tax.
 Chargeable on value when PET made. The value used is, usually, the lower of the value of the asset at the time of the PET and its value at the date of death (section 131 IHTA).
 On death add PET to the total of chargeable transfers in 7 years before the date of the gift.
 Gift into trust;
- PET if Bare trust or disabled trust.
- Chargeable lifetime transfer if interest in possession or discretionary trust.

Question 4

CLTs

Answer 4

Trustees pay a periodic (10 yearly) charge of 30% of the lifetime rate (20%) which would result in a maximum possible charge of 6% IHT on everything over the nil rate band available to the trust.
Also an exit charge based on the number of quarters out of 40 you are from inception or ten year charge.
Tax grossed up if paid by the settlor!!
 If donor dies within 7 years, death rates (40%) apply retrospectively less credit for tax already paid.
 Tax reduced by taper relief but no reclaim for any extra tax paid.

Question 5

Quick sucsession relief - Quick succession relief is available if property of deceased’s estate passed to an individual in 5 years before their subsequent death.

Answer 5

Percentage tapered on tax already paid.
100% in first year reducing 20% a year to end of 5th year.
% only relates to net increase of estate!

Formula is (tax paid*net transfer)/gross transfer *% relief

Question 6

Business Property Relief (BPR) – transfers of business property.

Answer 6

Must be owned 2 years to qualify.
Does not qualify if;
 Deal in securities, stocks, shares, land, buildings, make or hold investments.  Subject to a binding contract to sell.
 Not used in business in last 2 years or at time of transfer.
Relief of 100% if property qualifies as;
 Interest in unincorporated business (i.e. sole trader, partnership).
 Shareholding of any size in unquoted or AIM co.
Relief for 50% if;
 Controlling shareholding in fully listed company.
 Land, plant or machinery, wholly or exclusively used by company controlled by transferor or partnership.

Question 7

Agricultural Property Relief (APR) relief for Agricultural property in the UK, EEA, Channel Islands and Isle of Man including Land, buildings but not animals or equipment.

Answer 7

• Agricultural value has the relief NOT the development value.
• 100% relief for owner occupied farms and tenancies.
• 50% relief for interests of landlords in let farms.
• Must have been occupied for agricultural purposes for 2 years by transferor, or owned for 7 years and occupied by someone else for agricultural purposes.
• Not apply if binding contract for sale.
• APR given 1st if APR and BPR available.

Question 8

Woodland Relief

Answer 8

• Timber only not the land.
• Applied on death only.
• Defers tax until disposal of timber.
• BPR may be preferable.

Question 9

Gift with Reservation = Property given away but donor continues to enjoy a benefit as if still owned.

Answer 9

 Consequences;

• Value treated as if remains with the donor’s estate, and taxed accordingly.
• Gift also treated as a transfer of value at time of gift which may be chargeable at the time or at death within 7 years.
• Could result in a double tax charge.

Question 10

Non-resident - An individual will be non-resident if they meet any of the following tests;

Answer 10

 First automatic overseas test – resident in UK for one or more of the preceding three tax
years, but spent fewer than 16 days in UK.
 Second automatic overseas test – resident in the UK for none of the preceding three tax years and spent fewer than 46 days in the UK.
 Third automatic overseas test – work full time overseas and spend fewer than 91 days in the UK

Question 11

Resident - An individual will be resident in UK for a tax year if they meet automatic residence test or meet sufficient ties test

Answer 11

 First Automatic Resident Test – More than 183 days spent in UK
 Second Automatic Resident Test – Home in the UK
- Have home for more than 90 days in tax year
- Spend more than 30 separate days during the tax year in that home
- Do not have a home overseas for a period of 91 consecutive days
- Spend fewer than 30 days in overseas home
 Sufficient Ties Test – If neither the automatic overseas test, nor the automatic UK test are definitive, the ‘sufficient ties’ test can determine residence. This examines the following;
- Family
- Accommodation
- Work
- Number of days spent in UK
- Whether more time is spent in UK than anywhere else

Question 12

Domicile is

Answer 12

 Country of natural home, where expect to return to if go abroad.
 More permanent than residence.
 Not possible to have dual domicile.
 Domicile of Origin
- At birth get domicile of father.
- Illegitimate children take the domicile from their mother.
- Spouses have individual domiciles

Question 13

Domicile of choice

Answer 13

• Change domicile by moving to another country with intention of permanently staying there.
• No set rules but e.g. buy a house and intend to stay and be buried there when die.
• HMRC make a judgment on former UK domiciles and balance ties with alleged domicile of choice and domicile of origin.
• Domicile of choice can only be changed if;  No longer live there.
   Intend to live somewhere else.

Question 14

Deemed Domicile for IHT

Answer 14

 UK Domiciled liable for IHT on worldwide property.
 If domiciled outside UK only IHT on UK property.
 Deemed domiciled in UK for IHT if resident in UK for 15 of previous 20 years.
 If emigrate to another country, keep UK domicile for 3 years from acquiring new domicile.
 May be deemed domicile in the UK if maintain ties to the UK e.g. retain a bank account.

Question 15

Special Tax for Non Domiciled UK Residents

Answer 15

 Taxed on remittance basis for income arising outside UK.
- Not normally entitled to personal allowance or CGT exempt amount.
 Income and Gains taxed if:
- Money / Property brought to, used in, received in UK or used in UK for benefit of ‘relevant person’. Including services.
- Property or consideration for service, directly or indirectly derived from income or gains.