This document includes condensed notes for chapters 29, 30 and 31 of the Legal Foundations textbook included for the wills and administration of estates exam.
I received 75% distinction in this exam by revising using these notes.
These notes contain not only information for the course, but exam...
Lifetime transfer – Potentially Exempt Transfer (‘PET’) (main example – transfer to an individual); or
Lifetime Chargeable Transfer (‘LCT’) (main examples – transfer to most types of trust or to a
company)
STEP 2: Find the value transferred
Death estate – the open market value of assets in death estate less debts and funeral expenses
Lifetime transfers – the reduction in value of the transferor’s estate
STEP 3: Apply any exemptions and reliefs
Common examples:
Death estate and lifetime transfers:
Spouse/civil partner exemption
Charity exemption
Business Property Relief
Lifetime transfers only:
Annual exemption (available on PETs and LCTs)
Marriage exemption (available on PETs and LCTs)
Normal expenditure out of income (available on PETs and LCTs)
Small gifts exemption (available on PETs only)
STEP 4: Calculate tax at the appropriate rate(s)
PETs – if become chargeable – nil rate band @ 0% and 40% thereafter (allow for any cumulation).
Tapering relief may be available if any tax is payable.
LCTs – when transfer is made - nil rate band @ 0% and 20% thereafter (allow for any cumulation). If
transferor dies within seven years after transfer – re-calculate with nil rate band @ 0% and 40%
thereafter (allow for any cumulation). Tapering relief may be available if any tax is payable and credit
given for any tax paid when transfer made.
, Death estate – residence nil rate band @ 0% (if available), nil rate band @ 0% and 40%* thereafter
(allow for any cumulation).
*When large charitable donations are made (being at least 10% of the ‘baseline amount’ of a defined
‘component’ of a person’s estate), the rate of 40% is replaced by a rate of 36%.
Example IHT Question:
Arthur dies in July 2022 leaving his entire estate to his son, Derek. Arthur’s assets comprise Arthur’s
home worth £400,000, a portfolio of quoted shares worth £60,000, an insurance policy paying out
£90,000 on Arthur’s death which he assigned to Derek nine years ago and bank accounts with
balances totalling £32,000. He had credit card bills and utilities bills unpaid, amounting to £8,000.
Arthur's wife, Milly, died ten years ago, leaving all her estate to Arthur. Neither Arthur nor Milly
made any lifetime gifts (apart from the assignment of the insurance policy mentioned above). None
of the assets in Arthur's estate qualifies for any relief or exemption.
Which ONE of the following is the CORRECT amount of IHT payable on Arthur's estate?
Answer: Nil.
The insurance policy was assigned to Derek, so Arthur was not beneficially entitled to it at the date
of his death. It is therefore not included in the death estate. The remaining assets total £484,000 and
that was the amount chargeable to inheritance tax as none of the assets in the estate qualified for
any relief or exemption. Neither Arthur nor Milly had made any lifetime gifts that used their
respective nil rate bands (the assignment of the insurance policy by Arthur at its surrender value at
that time was over seven years before his death and so became exempt). As Arthur's house passes
to his son, Arthur's estate qualifies for his own residence nil rate band and takes the benefit of the
unused residence nil rate band of his spouse, Milly. Arthur's estate therefore qualifies for a 100%
uplift in the level of his residence nil rate band increasing it to £350,000 (£175,000 x 2). Arthur's
estate can take the benefit not only of his own nil rate band but also that of Milly. Arthur's estate
therefore qualifies for a 100% uplift in the level of his nil rate band, increasing it to £650,000
(£325,000 x 2). The whole of his estate is therefore taxed at 0%.
Example IHT Question:
Valerie died in September 2022. At the time of her death Valerie owned her home, The Lodge
(valued at £850,000). The property had originally been owned by Valerie’s husband, Mick, but it
passed to Valerie, along with the rest of Mick’s estate, when he died two years ago. Mick had made
no lifetime gifts.
In addition to the Lodge, Valerie had £190,000 in a bank account, a life insurance policy (which
Valerie took out and had written in trust for her son, Lenny, 20 years ago and which had a maturity
value of £90,000 on Valerie’s death) and £100,000 worth of shares in Janson Ltd. Janson Ltd is a
family company which manufactures cardboard packaging. The company was started by Valerie’s
late husband, Mick, 30 years ago. The company is now run by Valerie’s son, Lenny. Valerie had
owned the shares since the company started.
Valerie’s only surviving relative is her son, Lenny (25). Valerie’s entire estate passes to Lenny under
the terms of Valerie’s will. Valerie made no other gifts and had no debts.
Which ONE of the following CORRECTLY states the amount of IHT which is payable on Valerie’s
estate?
Answer -
Death estate - 850,000 + 100,000 + 190,000 = 1,140,000 (Policy not included because in trust for
Lenny). The shares benefit from 100% BPR which leaves £1,040,000 to be taxed. Valerie’s home will
be inherited by her son and so the estate benefits from a residence nil rate band of £350,000
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