Flashcards in Inheritance Tax Deck (57)
When is IHT payable?
Payable on certain transfers of value which are :-
*Value of someone's estate on death
*Certain transfers during someone's lifetime
What are the 2 rates payable of IHT on lifetime transfers?
0% when covered by a nil rate band
What are the 3 rates of IHT payable on an individuals estate?
O% - when covered by a nil rate band
36% ( a reduced rate where 10% or more of net estate is left to charity)
When did the transfer of the unused nil rate band between spouse or civil Partner come into play?
Calculated on a proportionate basis
Second death is after October 2007 but first death can be before this
Maximum is only 2 nil rate bands
Is IHT a cumulative tax?
How is the nil rate band applied when it comes to chargeable transfers?
It is applied in date order
It begins with the earliest chargeable transfer in the last 7 years
What is the situation if the transferor (donor) is UK domicile in respect to IHT?
They will pay IHT on all their assets whether they are in the UK or held worldwide
What is the IHT situation if someone is deemed domicile?
Deemed domicile is where they have been resident in the UK for at least 17 out of the previous 20 years
IHT will apply to their assets whether they are in the UK or held worldwide
What is the IHT situation where some is domiciled outside of the UK?
They will only pay IHT on any property situated in the UK will be chargeable
What can someone who is domiciled outside of the UK and they have a UK domiciled spouse in respect to IHT?
They can elect to be treated as UK domiciled for IHT purposes
The advantage is that they will be entitled to an exemption but will be liable to IHT on their assets in the UK and worldwide
For a lifetime transfer to be considered then what also must be considered?
That there must be an intention of making a gift
Is maintenance by court order a transfer of value?
No as this is not considered a gift as there is no intention - it is something that needs to be done
Is any sale at arms length considered to be a transfer of value for IHT purposes?
How can a transfer of value be measured from an IHT perspective?
This is a reduction in the value of the estate
Eg if someone owns a pair of vases worth £20K, gives one vase to a relative which is worth £6000. The transfer of value is £14k as this is the reduction of the value of the estate (the estate still holds the other vase worth £6000)
Is there a transfer of value of the transaction does not reduce the value of the estate?
What are the 5 classifications of a lifetime transfer?
*Gift with a reservation of benefit
*Potentially exempt transfer (PET)
*Chargeable lifetime transfer - not taxable
*Chargeable lifetime transfer - taxable
Name some exempt transfers? (8)
*Transfers between spouse and civil partners - only up to £325000 where the recipient is not domiciled in the UK
*Gifts to charities and political parties
*Gifts for the national benefit eg to libraries and museums
*Annual exemption of £3000 - this can be carried forward for 1 year
*Gifts for marriage - £5000 from parent, £2500 from grand parent, great grandparent, prospective spouse, civil partner, £1000 for any other person
*Certain gifts for maintenance and education
*Small gifts of £250 - this can be any number provided that they are to different recipients
*Lifetime gifts from normal expenditure from surplus income (payments do not need to be equal in size)
What are gifts with reservation of benefit?
This is where an individual makes a gift but continues to take a benefit from it eg giving away a house and continuing to live in it
How can the gift of reservation of benefit rules be avoided?
By paying full commercial rent for any period of employment
What is pre-owned assets tax (POAT)?
This is an annual income tax charge
Introduced in Finance Act 2004
Took effect on 6th April 2005 but covers from 17th March 1986 any assets owned which are then disposed of
What does POAT cover?
Land - where someone has transferred property and continue to live in it, income tax is based on the equivalent market rentals
Household and chattels (personal goods) - still being used by the transferor after transfer - charged as 3% of capital value
Intangible assets eg shares and insurance polices
At what value is POAT not paid as the asset is considered to be exempt?
Any asset under £5000
How can you elect for POAT not to be paid?
By paying full market rent or elect for the assets to be subject to IHT on death i.e. elect for it to be a gift with reservation of benefit
Name 3 examples of PETs
A lifetime transfer made to:-
*A bare trust
*A disabled trust
When is IHT payable in respect to a PET?
IHT is not paid at the outset however if the transferor dies within 7 years, then the PET has failed and it becomes chargeable.
The amount to pay can be reduced by taper relief
What does taper relief apply to?
It applies to the tax on the PET and not the transfer
No tax no taper!!!!
What are the 3 transfers into trusts which are considered as CLT (Chargeable Lifetime transfers)?
Interest in possession trust - if made on or after 22nd March 2006
Accumulation and Maintenance Trusts created on or after March 22nd 2006
(These are sometimes referred to as relevant property trusts)
Is a chargeable lifetime transfer immediately chargeable to IHT?
No - not if over a 7 year period it falls within the nil rate band then there is no immediate charge. If this were over the nil rate band then the excess would be charged immediately at 20%.
What is the 14 year rule?
If someone lives for 7 years or more after making a PET then it will become exempt however if someone makes a CLT, even if more than 7 years pass before death then this can effect transfers in the next 7 years.