IHT worked example

Question 1

Example 1:

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts.
A PET which if failed would have a chargeable value of £200,000 (10 years before death). An LCT with a chargeable value of £350,000 (9 years before death). IHT of £5,000 was paid on the LCT at the time.

Answer 1

• No IHT is due on the lifetime gifts when the woman dies.
• Her death estate still has a full NRB available.
• Her death estate is taxed at 40% on the value above the NRB. (£500,000 - £325,000 = £175,000). £175,000 x 40% = £70,000

Question 2

Example 2:

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts.

A PET which if failed would have a chargeable value of £200,000 (9 years before death). An LCT with a chargeable value of £350,000 (1 year before death). IHT of £5,000 was paid on the LCT at the time.

Answer 2

• The PET is now exempt from IHT as it was made more than 7 years before her death.
• The LCT was made less than 7 years ago so it is reassessed for IHT. After applying the NRB (350,000 minus 325,000), the remaining £25,000 is taxed at the death rate of 40% = £10,000. Credit of £5,000 is given for the £5,000 tax paid in her lifetime, leaving £5,000 to pay.
• The NRB on death is reduced by the chargeable value of the LCT. Therefore no NRB is available to the death estate.
• Her entire death estate (£500,000) is taxed at 40%. = £200,000

Question 3

Example 3:

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts. An LCT with a chargeable value of £350,000 (9 years before death). IHT of £5,000 was paid on the LCT at the time. A PET which if failed would have a chargeable value of £200,000 (1 year before death).

Answer 3

• The LCT is not reassessed on death as it was made more than 7 years before death. It was more than 7 years before the PET too so the cumulative total on the PET is £0.
• The PET has failed and is chargeable to IHT. It is below the NRB so is taxed at 0%
• The NRB on death is reduced by the value of the PET (£325,000 - £200,000) = £125,000.
• Her death estate is taxed at 40% on assets above the remaining NRB. (£500,000 - £125,000 = £375,000). £375,000 x 40% = £150,000

Question 4

Example 4:

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts.

A PET which if failed would have a chargeable value of £200,000 (2 years before death)An LCT with a chargeable value of £350,000 (1 year before death). IHT of £5,000 was paid on the LCT at the time.

Answer 4

• PET has failed so chargeable to IHT - it falls below NRB so is taxed at 0% (325,000 minus 200,000 = £125,000 NRB left
• LCT is reassassed at death rate of 40% so using left over NRB (350,000 minus 125,000 = 225,000 which is taxed at 40% so £90,000
• Using credit of 5000, now LCT left to pay is £85,000
• No NRB available at death rate so entire death estate is taxed at 40% leaving £200,000

Question 5

An unmarried woman dies and leaves her estate (worth £500,000) to her children. The estate does not include any residential property. She made the following lifetime gifts.

A PET which if failed would have a chargeable value of £200,000 (6 years before death)An LCT which if failed would have a chargeable value of £350,000 (4.5 years before death). IHT of £5,000 was paid on the LCT at the time.

Answer 5

• The PET has failed and is chargeable to IHT at 40%. The chargeable value is below the NRB so is taxed at 0%.
• The LCT is reassessed for IHT at the death rate of 40%. After applying the available remaining NRB of £125,000, the balance of £225,000 is taxed at the death rate of 40% = £90,000. As the LCT was made 4-5 yrs before death taper relief reduces the tax payable by 40%. £90,000 x 60% = £54,000. Credit is given for the £5,000 tax paid in her lifetime, leaving £49,000 to pay re the LCT.
• The cumulative total on death is more than £325,000 so no NRB is available. The entire death estate (£500,000) is taxed at 40% = £200,000 to pay re the death estate.

Question 6

IHT of death estate example

Deceased’s estate includes:
* One PET two years before death of £50,000 to son
* House valued at £500,000 (total) owned as joint tenants with husband
* Cottage valued at £400,000 (total) owned as an investment property as tenants in common in equal shares with brother.
* Bank account in sole name containing £300,000
* Discretionary pension lump sum written on trust for son £150,000
* Outstanding credit card debt of £2,000 and funeral costs of £3,500
* The valid will leaves the cottage to her brother. Everything else is left to her son, except for £20,000 left to charity

Answer 6

• Cumulative value of £50,000 for failed PET- deduct 6,000 for annual exemption leaving £44,000
• Taxable estate includes: house (500,000 divided by 2 = 250,000), cottage (400,000 divided by 2 = 200,000 but since co-owned by someone other than spouse, 10% is deducted (200,000 minus 20,000 = 180,000) and bank account of 300,000 giving a total of 730,000 gross estate
• Deduct liability: funeral costs and credit card totals 5,500 so (730,000-5,500 = £724,500 net
• Apply exemptions and reliefs: charity exemption so £20,000 passes also spouse exemption so her share in house (250,000) passes to husband free from tax
• Value of estate chargeable to tax is: 724,500 - 270,000 = 454,500
• RNRB not applicable as while owning a qualfying residential interest, it is not passing to a lineal descendent but her husband. Also cottage is not a qri as it is owned as an investment.
• Deduct 325,000 - 44000= £281,000 so PET is not payable
• 454,000 minus remaining NRB 281,000 leaving 173,500
• 173,500 times 40% giving IHT due of £69,400