A brief overview of Inheritance Tax - including calculation process and important scenarios to be aware of when calculating inheritance tax.
You will be assessed on this material if you are taking the LPC.
The document then also covers the practice and procedure undertaken during probate.
Wills and Administration of Estates – Inheritance tax & probate practice and procedure
Inheritance Tax.
There are three main occasions when IHT may be charged:
On death
o Inheritance tax is intended primarily to take effect on death.
o IHT is charged on the value of the estate subject to various exemptions and reliefs.
On lifetime it’s made to individuals within seven years prior to death.
o IHT is also charged on certain lifetime gifts or transfers if the donor dies within 7
years after making them.
o Such gifts are called ‘potentially exempt transfers’ because at the time when the
transfer is made no IHT is chargeable; the transfer is potentially exempt.
o If the transferor survives for seven years, the transfer becomes exempt. If he dies
within that period, the transfer becomes chargeable.
On lifetime gifts to a company or into a trust.
o Inheritance tax might also be avoided by the use of a trust or corporate entity.
o A lifetime gift to a company or into a trust is immediately chargeable to IHT at the
time when it is made unless the trust is for a disabled person.
The main charging provisions:
Inheritance tax is charged on the value transferred by chargeable transfer.
The term chargeable transfer is defined as a transfer of value which is made by an individual
but is not an exempt transfer.
This charge may apply in any of the three situations outlined above, because the term
chargeable may refer to:
o The transfer on death
o A lifetime transfer which is potentially exempt when it is made but becomes
chargeable because the transferor des within seven years
o A lifetime transfer which is immediately chargeable at the time when it is made
THE METHOD:
IDENTIFY THE TRANSFER OF VALUE.
IFIND THE VALUE TRANSFERRED
APPLY ANY RELEVANT EXEMPTIONS AND RELIEFS.
CALCULATE TAX AT THE APPROPRIATE RATE.
o A range of tax rates apply to IHT, the lowest being zero per cent. Two relevant
bands:
The nil rate band - £325,000 available for all transfers of value.
The residence nil rate band - £125,000 available only on a transfer on death
where there is a qualifying residential interest.
The nil rate band will not necessarily be available in full for any given transfer. In order to calculate
the available nil rate band on any transfer whether during lifetime or on death, one must first look
back over the seven years immediately preceding the transfer.
Any chargeable transfers made by the transfer during that period must be taken into account in
order to determine how much of th enil rate band remains available.
This process is known as cumulation -used solely to calculate whether the nil rate band is available
for any chargeable transfer.
, Residence nil rate band is not available for lifetime transfers it will be available in full on death,
subject to any adjustments in relation to estates over £2 million.
Transfers on death.
1. Identify the transfer of value.
Treated as having made a transfer of value immediately before his death.
The value transferred is the value of the deceased estate immediately before his
death.
A persons estate is defined by section 5(1) IHTA 1984 to mean all the property to
which he was beneficially entitled immediately before his death with the exception
of excluded property.
o Property within this definition falls into three categories:
Property which passes under the deceased’s will or on intestacy.
Property to which the deceased was beneficially entitled
immediately before his death but which does not pass under his wil
or on intestacy.
Property included because of special statutory provisions.
2. Find the value transferred.
Basic valuation principle.
o Assets in the estate are valued for IHT purposes at the price which the
property might reasonably be expected to fetch if sold in the open market
immediately before the death -section 160.
o Section 171 provides that where the death causes the value of an asset in
the state to increase or decrease, that change in value should be taken into
account.
o Liabilities owed by the deceased at the time of death are deductible for IHT
purposes provided that they were incurred for money or money’s worth.
3. Apply any relevant exemptions and reliefs.
The main exemptions applicable on death depend on the identity of the beneficiary.
Reliefs depend on the nature of the property in the estate.
Spouse or civil partner exemption:
o Section 18
o Any property included in the estate for IHT purposes is exempt if it passes to
the deceased’s spouse or civil partner under the deceased’s will or intestacy
pr in the case of joint property by survivorship.
Charity exemption
o Section 23
o Any property forming part of the deceased’s estate for IHT purposes with
passes on death to charity is exempt.
o If the deceased had a life interest in trust property which passes under the
terms of the trust to charity, the charity exemption applies.
o A similar exemption applies to gifts to certain national bodies providing a
public benefit, such as museums and art galleries and to political parties.
Business and agricultural property relief.
o Business property relief applies to reduce the value transferred by a transfer
of relevant business property by a certain percentage, provided that the
transferor owned the property for the two years immediately before the
transfer.
The reduction is 100% for:
A business or an interest in a business
Unquoted shares.
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