4 - IHT Flashcards
IHT
What are the types of transfer and differences?
- Chargeable Lifetime Transfers (CLT) - You pay tax on these when the gift is made (if above the nil rate band) not on death, but at a lower rate of 20% (in tax tables).
- Potentially Exempt Transfers (PET) - Tax is only payable when you die, if you die within 7 years of the transfer. The rate is higher (40%) unless you give 10% of your estate to charity then it goes to 36% (all rates in tax tables).
A PET which ends up being within 7 years of your death (and so is taxable) is called a failed PET.
IHT
How is the tax on CLTs calculated?
Any CLT at any time in a persons life must be assessed for IHT.
First sum up all other CLTs in the 7 previous years to see how much nil rate band you have left.
On the portion of the new CLT that exceeds the nil rate band (£325k in tax tables) you pay tax at 20% (in tax tables).
IHT
How is tax on death calculated (on PETs and CLTs)?
On death all PETs and CLTs within 7 years before death must be assessed for IHT (so taxed again on CLTs).
First look at each gift and sum the value of transfers in the 7 years before the gift (so you could be looking up to 14 years before death) to see how much nil rate band is available for that transfer.
Charge 40% tax (or 36% with charity discount) on the excess over the NRB, but reduce using taper relief if the gift was more than 3 years before death.
For CLTs if you’ve already been taxed on them you can deduct this from tax payable on them when you die.
IHT
How does taper relief work?
Taper relief relates to tax payable on death.
If the transfer was more than 3 years before death, you get a 20% discount for each year.
So you pay 80% if it was 3-4 years before death, 60% for 4-5 years, down to zero for 7 years+.
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Which transfers are CLTs and which are PETs?
Most transfers will be PETs, for example gifts to individuals, bare trusts or disabled trusts.
Gifts into other trusts (notably discretionary trusts) are CLTs.
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What exemptions are there from IHT?
- Main residence (where left to direct descendant) up to £100k (in tax tables);
- Gifts between spouses (although if you are a UK domicile and spouse isn’t then gifts to them are limited to the NRB);
- Annual exemption (£3k in tax tables), can carry forward for 1 year;
- Small gifts (£250 per person you give to each tax year, in tax tables);
- Normal expenditure - Out of your income, must be regular but doesn’t need to be a fixed amount;
- Wedding gifts (amount depends on your relationship, see tax tables)
- Charity or political party gifts;
- Death on active service or responding to emergency situations.
IHT
What are the rules around UK/non-UK people?
IHT is based on your domicile rather than residency.
As with usual tax rules, UK domiciles pay IHT on global assets, non-UK domiciles only on UK assets.
However non UK domiciles can elect to be treated as UK domicile, which means they would pay IHT on global assets, but would benefit from full spouse exemption (not limited to £325k).
IHT
What is the valuation of the gift/transfer for IHT purposes?
Generally this is based on the cost to the estate (not the value to the transferee) at the time of the transfer.
In particular if you transfer a 10% shareholding when you previously held 55% of the company, you have lost a controlling share, so the value might be higher than just 10% of the company value.
Should be based on the open market value. You can deduct transfer expenses paid by transferee (eg legal costs) and CGT (if the transfer is liable to CGT and paid by the transferee).
IHT
Can the valuation of a gift/transfer change?
If the value of a transfer falls between a PET date and your death, relief may be available on the fall in value.
IHT
What are:
Gratuituous intent?
Associated operations?
- Gratuitous intent refers to the intent of the transfer. If you’re making a commercial transaction (no loss to the estate) rather than trying to give something away, you shouldn’t get taxed.
- Associated operations refers to a series of transactions that have been strung together to avoid IHT. HMRC reserve the right to group together these transactions and treat them as one operation, so that if you’re ultimate aim is to gift your assets, you’ll be taxed accordingly.
IHT
How does quick succession relief work?
If a person receives a gift from somebody who has died and tax was paid on that gift, and they subsequently die themselves shortly afterwards, a reduction in IHT is available.
This is based on the number of years between the two people dying.
The IHT due on the second death is reduced by a percentage of the tax paid on the first death (100% in first year, then 80% etc, in tax tables).
IHT
What is the calculation for quick succession relief?
Calculation is based on the amount of IHT paid on the original (i.e. first) death and the net and gross amounts they transferred to the second person (who has now also died).
IHT
What is the treatment if people die at the same time?
Generally the law assumes the eldest died first, however for IHT purposes they are assumed to die simultaneously (unless of course it can be shown that one person died first).
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What reliefs can spouses share between each other?
The main one is nil rate band sharing. If one spouse dies and X% of their nil rate band doesn’t get used, their partner can extend their own nil rate band by X% when they die.
eg wife dies and uses £162.5k of the £325k band. Husband dies years later when NRB is £400k, he can use another 50%, i.e. £600k nil rate band in total.
Also get residence nil rate band transfer. £100k extra residence NRB if they died before 6/4/17, otherwise the residence NRB in place on first death.
IHT
What was the recent change regarding trusts and IHT?
Interest In Possession (IIP) trusts used to have special treatment, but are now treated the same as discretionary trusts.
