Chapter 4 - IHT

Question 1

Rates during lifetime

IHT being paid during lifetime

Answer 1

• Chargeable transfers made in lifetime need to be added together.
• Once the cumulation exceeds the NRB, the IHT becomes payable
• If survived by 7 years then the transfer stops using the NRB for the estate
• PET’s are not considered for cumulation in lifetime.

Question 2

Rates on death

Answer 2

£325,000 NRB, taxed at 0%
40% taxed above the NRB, can be reduced using charitable gifts etc.
Any transfers on or within 7 years of death will also use the NRB

Question 3

Cumulation process on death

Answer 3

• Non-exempt transfers within 7 years of death use up the NRB first, before the estate can use it
• Done in chronological order of date, eldest first
• IHT payable when NRB is used up

Question 4

Value of transfers

Answer 4

• The transfer value is always the loss to the estate, rather than value of the item. So this does not increase throughout the 7 years
• Annual exemptions can be used to reduce value for IHT purposes

Question 5

Saskia inherited 2 vases from her late grandma in 2014.
Recently valued at £20,000 for the pair, it was explained to her that if she only owned one vase it was worth £5000 as they are worth more as a pair.

What would the value of the transfer be if she was to gift one to her daughter?

Answer 5

As IHT works on loss to the estate, this would be a £15,000 transfer. Despite the fact that the vase on its own is worth £5000

Question 6

Types of Exempt IHT Transfers

Answer 6

• Between spouses/civil partners
• Small gifts of £250 to unlimited people
• Gifts on Marriage
• Gifts our of normal expenditure
• Charity, political party, national benefit
• Annual exemption of £3,000 per tax year

Question 7

Annual exemption

Answer 7

• Currently £3,000 per tax year
• Can be part of a bigger gift, or cumulation of smaller gifts
• any unused can be used in the subsequent tax year, after using that years exemption
• Can be used in conjunction with gifts on marriage exemption, but not the small gifts exemption

Question 8

Annual exemption - example

Spencer, a UK domicile is looking to transfer a lump sum of money to his nephew to assist with purchasing a new home.

His only previous transfer was for £1000 during the last tax year.
How much could he transfer to his nephew without any immediate or longer-term IHT implications. Ignore the gifts from normal expenditure rule

Answer 8

£5,000
£3,000 this tax year and £2,000 unused from the previous tax year

Question 9

Small gift exemption

Answer 9

• Can be to an unlimited number of people, but cannot make multiple transfers to the same person in the same tax year.
• Cannot combine with the annual exemption
• Cannot be part of a larger gift
• Anything above needs to rely on other exemptions otherwise will not be exempt

Question 10

Transfers between spouses or civil partners

Answer 10

• Unlimited transfers during life and on death
• Provided the survivor is a UK resident and UK domiciled
• Surviving spouse can inherit any unused NRB from the deceased

Question 11

Gifts on marriage

Answer 11

• Made to any individual on their marriage
• Limited to £1,000 for anyone to classify as exempt
• Increased to £2,500 if recipient is grandchild, or your future spouse
• Increased to £5,000 if recipient is son or daughter of donor

Parents can leave £5,000 each to their child getting married

Question 12

Gifts out of normal expenditure

Answer 12

Will be exempt providing
* Made from income and not capital
* Doesn’t reduce standard of living
* Habitual

Question 13

Charity,Political parties, national benefit

Answer 13

• Charity gifts during lifetime and any left in Will on death
• gifts to political party during lifetime
• gifts considered part of national benefit
• gifts for educational purposes

Question 14

Potentiall exempt Transfers (PETs)

Answer 14

Transfers that only become exempt if survived by more than 7 years.
No lifetime IHT considerations
Can utilise any available annual exemptions, as AA can be used as part of a bigger gift

Question 15

Types of PETs

Answer 15

• Outright gifts
• Gifts/Transfers to Absolute/Bare trusts
• Gifts/Transfers to vulnerable persons trusts

Must give up control of money

Question 16

Father makes a gift of £10,000 to his daughter having made no previous gifts, what is exempt and what is classed as a PET?

Answer 16

• £6,000 exempt - This and previous years annual exemption
• £4,000 PET

Will become exempt if survives 7 years, if not it will fail and use £4,000 of the NRB that the father has.

Question 17

PET - Example

2.5 years before her death, Abigail made her only non-exempt transfer of £100,000 to her daughter Sally. She always used up her annual gift exemptions by helping her nephew through university.

If her estate on death (no property) was £300,000, calculate the IHT payable.

Answer 17

As under 3 years, 100% of the gift is classed as a failed PET.
Uses up the NRB first, so £225,000 available for Abi’s estate
£300,000 - £225,000 = £75,000 taxable estate
£75,000 x 40% = £30,000 IHT payable

Question 18

Chargeable Lifetime Transfers (CLT’s)

Answer 18

Transfers into:
* Interest in posession trusts
* Discretionary trusts

Can be chargeable and taxable (Lifetime IHT)
or chargeable and not-taxable (under £325k NRB)

Question 19

An individual makes 100k transfer to a discretionary trust having made no previous gifts, how much of this is a CLT?

Answer 19

CLT’s can use the annual exemption if not previously used so £6,000 is exempt, leaving £94,000 CLT.

In isolation this wouldn’t attract lifetime IHT as it is cumulatively below the NRB.

Becomes exempt if survived by 7 years, if not, CLT will fail and use £64,000 of the £325k NRB.

Question 20

Individual makes £400k transfer to discretionary trust having made no previous gifts. What is the CLT and the charge?

Answer 20

• £6,000 exempt as not used current and last years annual allowance = £394,000 CLT.
• Above the £325k NRB so attracts lifetime IHT - Charged at 50% of the death rate of 40% = 20%
• Only on the excess above the NRB, £394k - £325k = £69k excess
• Charged at 20% = £13,800

Question 21

Lifetime IHT charge - paid by the Trust

Answer 21

• Excess above NRB taxed at 20%
• Payable within 6 months of the end of the month in which the transfer is made

Question 22

Lifetime IHT charge - paid by the settlor

Answer 22

• Excess above NRB effectively taxed at 25%
• Loss to the estate principle applies, tax on the transfer and then also on the tax, as this tax is also seen as a loss to the estate

Question 23

Lifetime IHT charge - paid by the Trust

An individual makes their first chargeable lifetime transfer of £394,000 in the current tax year. They have used their gift allowances elsewhere in this and last tax year.

Calculate the lifetime IHT payable of paid by the Trust itself

Answer 23

• £394,000 - £325,000 = £69,000
• £69,000 @ 20%= £13,800

• Excess above NRB taxed at 20% (Half of the death rate, which is 40%)
• Payable within 6 months of the end of the month in which the transfer is made

Question 24

An individual makes their first chargeable lifetime transfer of £394,000 in the current tax year.

Calculate the lifetime IHT payable of paid by the Settlor

Answer 24

• £394,000 - £325,000 = £69,000
• £69,000 @ 25% = £17,250

• Excess above NRB is effectively taxed at 25%
• Loss to the estate principle applies, tax on the transfer and then also on the tax, as this tax is also seen as a loss to the estate

Question 25

What is the 14 year rule?

Answer 25

* Only an issue on death * Where multiple gifts were made in lifetime * Triggered by a CLT only, PET's do not trigger this * Affects gifts and not the estate

Question 26

Taper relief

Answer 26

* Reduction in IHT payable on failed PETs and CLTs only * Where death occurs between 3 and 7 years following a gift/transfer * Applied on a reducing scale from year 3-7 * **Tapers the tax not the gift** * Years 0-3 is taxed at 100% * Then reduced by 20% for each subsequent year until completely out of estate after 7 years

Question 27

What is the reduced rate of IHT tax?

Answer 27

* When an individual leaves at least 10% of **net** estate to a charity in their will, their IHT will reduce to 36%. * Essentially a 10% reduction in IHT * Must be left in will, cannot be applied after death

Question 28

Quick succession relief

Answer 28

* IHT tax reducer * Where someone inherits assets from an IHT charged estate, dies within 5 years and IHT is payable on their death.

Question 29

# 36% charity IHT tax Calculating the net estate of a deceased person

Answer 29

* Total assets = gross estate * Deduct NRB and any exempt transfers to spouse * **Do not** deduct RNRB or the charitable gift itself * Amount leftover = net estate * If 10% or more of this is left to charity, the 36% tax applies * You then do the calculation again as you would (removing NRB's, spousal transfers & the charity donation) and tax it at 36%

Question 30

# Charity gift for IHT purposes - Example Simon died with an estate valued at £940,000, including a house valued at £360,000. He left £40,000 to cancer research in his will and split the rest equally to his wife and brother. Assuming no lifetime transfers were made, what will the IHT liability be?

Answer 30

**Gross estate** * 940,000 - 325,000 = 615,000 (Deduction of NRB) * 615,000 - 450,000 = 165,000 (deduction of spousal transfers,) * Net estate = £165,000 x 10% = £16,500 * As he has left over 10% to charity, his IHT will be 36% **Tax** * 940,000 - 325,000 (NRB) -450,000 (Spousal) - 40,000 (charity) = £125,000 * 125,000 x 36% = £45,000

Question 31

Quick Succession relief

Answer 31

* For when someones inherits assets from an IHT charged estate, they pass away within 5 years and IHT is payable on their death. * IHT 'tax reducer' where quick succession of deaths (5 yr period) occurs * Relief is calculated on the estate of the 1st deceased, then applied as a tax reducer on the second estate * Tapered depending on years since the IHT was paid

Question 32

Quick succession relief formula ## Footnote Formula includes: tax paid on inheritance gross gift % relief applicable

Answer 32

* (Gross gift - tax paid on inheritance) / gross gift = A * A x tax paid on inheritance x % applicable = QSR available ## Footnote Years since IHT paid: * 0-1 = 100% relief * 1-2 = 80% * 2-3 = 60% * 3-4 = 40% * 4-5 = 20%

Question 33

# QSR calculation example Tom died recently with an estate value of £925,000. This includes his home valued at £280,000 and inheritance from his dad, received 3 and a half years ago of £655,000. This was reduced to £525,000 after the IHT was paid. * Calculate any QSR his executors can claim * Calculate the IHT owed on his estate ## Footnote Tom was never married but had a daughter who will receive all of the estate

Answer 33

**QSR calc** * (655,000 - 130,000) / 655,000 x 130,000 = £104,198.47 * As his dad died between 3-4 years ago, tax reducer of 40% * 104,198.47 x 40% = £41,679 able to be reclaimed **IHT owed on his estate** * 925,000 - 500,000 (NRB & RNRB) = £425,000 * 425,000 x 40% = £170,000 - £41,679 QSR = £128,321

Question 34

Business Relief * What is it * What does it include & the % of relief

Answer 34

IHT relief on transfer of business property, both lifetime transfers and on death. Designed to remove an individual's business from their estate for IHT purposes Includes: * Business or interest in a business - 100% relief * Shares in unlisted company (AIM, EIS & SEIS) - 100% relief * Controlling shares in a listed company - 50% relief * Land, building and machinery owned by the deceased and used in their business - 50% relief

Question 35

# Business relief - Example June 2018 - Duncan invested £70k into Asset X which qualifed for BR July 2020 - Invested £450k into asset Y which also qualified for BR August 2021 - Duncan passes away. value of X is £120k & value of Y is £500k Assets are passed to his son, all other assets are passed to his wife. * What, if anything, was the IHT liability due?

Answer 35

* Asset X receives 100% relief as over 2 years, asset Y does not. * £500,000 - £325,000 = £175,000 @ 40% = £70,000

Question 35

What are the rules in order to qualify for Business relief?

Answer 35

* Property must have been owned for at least 2 years * Must be a trading company/used asset * Must not be a binding contract of sale on death ## Footnote Qualifying investments are AIM shares, EIS and SEIS

Question 36

Agricultural Relief * What is it? * What is the relief % for owner occupied / tenancies, and owners of land which is let out to other farmers?

Answer 36

Business relief for farms * Assets include Agricultural land, crops and buildings * Does not include livestock as they are seen as a wasting asset * 100% relief for owner occupied/Tenancies * 50% relief for land owners who let out to other farmers

Question 37

Woodlands relief

Answer 37

* Special relief for growing timber in the UK/EEA * Only applies to the timber and not the land it sits on * Available on death only, no lifetime transfers * Defers overall IHT until the timber is sold

Question 38

# Retained interests Gifts with reservation

Answer 38

* Introduced in 2005 * Asset given away where the donor still benefits from asset * Treated as having never been given away * Will be included in estate for IHT, using value at date of death

Question 39

Pre-owned asset tax

Answer 39

* For assets gifted before gift with reservation was introduced (2005) * Income tax instead of IHT * Most common on houses gifted where donor continues to live. * Donor either has to pay market rent, taxed on new owner * Or rent free but they get taxed on market rent * Could also be applied to chattels, HMRC would apply a flat rate of 3.75%

Question 40

# Retained interest - Example Marco made 2 gifts of property to his daughter: * 2001 - gifted family home but continued to live there rent free * 2015 - family cottage but continues to spend the summer there on holiday How would they be considered for * Gifts with reservation (GWR) * Pre-owned asset tax (POAT) ## Footnote Hint - GWR was introduced in 2005

Answer 40

**Family home** would be subject to the POAT rules * Marco would either need to pay market rent to Emily who will be taxed, or not pay rent and be charged income tax himself on the rental income. * As over 7 years, wouldnt be included in estate **Cottage** is subject to GWR rules * On death, cottage would still form part of his estate even if gift is survived by 7 years. Value at time of death would be used and not time of transfer