69 Pages of notes covering the whole of the Wills and Administration of Estates Exam.
Covers all topics including - Wills, Inheritance Tax, Capital Gains Tax, Income Tax.
Inheritance Tax overview
There are three main occasions when IHT may be charged: On death; on lifetime gifts made
within 7 years of death (PET) and on lifetime transfers or lifetime gifts to a company or into
a trust (LCT) both during life (20%) and upon death (40%).
Death
IHT is intended primarily to take effect on death. When an individual dies, IHT is charged on
the value of his estate subject to various exemptions and reliefs.
Lifetime gifts made to individuals within 7 years prior to death
IHT is charged on certain lifetime gifts or transfers if the donor dies within 7 years after
making them. Such gifts are called ‘potentially exempt transfers’ (PET) because at the time
when the transfer is made no IHT is chargeable; the transfer is potentially ‘exempt’. If the
transferor survives for 7 years, the transfer becomes exempt. If he dies within that period,
the transfer become chargeable.
Lifetime gifts to a company or into a trust
IHT may be avoided by the use of a trust or corporate entity a lifetime gift to a company or
into a trust is immediately chargeable to IHT at the time when it is made, unless it is for a
disabled person.
Steps to calculate IHT
Step 1 Identify transfer value = date and type of transfer of value
- Death
- LCT – into a trust (not a disabled trust) or into a business.
- PET – if the above LCT is not satisfied.
Step 2 Find value transferred = amount of the reduction in transferor’s estate & identify
value of estate
Step 3 Apply relevant exemptions and reliefs
Step 4 Calculate tax at appropriate rate – calculate each transfer – lifetime first then on
death
Step 1: Identify the transfer value
There are three main Chargeable transfers/gifts which are subject to IHT - IHTA 1984, ss 1, 2:
- On death (40%) deemed transfer of value;
- Potentially exempt transfer (PET) (40% or tapered) - lifetime transfer to individuals -
7 years of death;
- Lifetime chargeable transfer (LCT) - to company/trust (unless for a disabled person).
IHT is immediately chargeable at the time when it is made (20% or 40% if
recalculated at death)
,Step 2: Find value transferred
- Value transferred = the amount of reduction in transferor’s estate & identify value of
estate.
- Death estate = valued at open market value minus debts/liabilities and reasonable
funeral expenses.
- Lifetime transfers = the amount by which the transferor’s estate has been reduced.
Step 3: Apply relevant exemptions and reliefs
- Exemptions that apply both to lifetime and transfers = to spouse or civil partner or
charities.
- Exemptions for PETs & LCTs = annual exemption, marriage gifts and gifts made as
normal expenditure out of income. Small gifts exemption only for PETs.
- Business and agricultural property relief - lifetime and death = unquoted shares etc
see below
Step 4: Calculate tax at appropriate rate
- Calculate each transfer – lifetime first then on death.
Rates of tax –
- Residence nil rate band: a home which is being closely inherited by a lineal
descendent (child, step-child). First £150,000 at 0%.
- Overall nil rate band - £325,000 – available for all transfers of value (can add spouses
if not used = £650,000). Nil rate band – first £325,000/next £325,000 after
residence nil rate band is taxed at 0%.
o ‘cumulation’ - calculate what NRB is left after each chargeable transfer within
7 years and each transfer has its own 7-year period
- If you do not use the above Nil rate bands – the bands can be transferred to spouse.
i.e. another £325,000 on top of their own £325,000.
- Anything above these amounts are taxed at the death rate of 40%.
- PETs – chargeable if did not survive 7 years from date of transfer.
o Nil rate band @ 0% and 40% thereafter – allow for cumulation – tapering
relief applicable if IHT payable.
o Annual exemption - £3,000 per year – can carry over 1 year.
- LCTs = when transfer is made - nil rate band @ 0% and 20% thereafter (allow for any
cumulation).
o If transferor dies within 7 years – re-calculate - 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 – home and lienal descendants (currently
£175,000 subject to adjustments for estates over £2 million) nil rate band @ 0%
thereafter 40%* (allow for any cumulation).
, o Large charitable donations (at least 10% of a person’s estate) - 40% is
replaced by a rate of 36%.
Formula for identifying share of tax - Inherited amount x total tax liability = specific tax
liability
, Calculating IHT on death
Step 1 – identify the transfer of value
When a person dies, he is treated for IHT purposes as having made a transfer of value immediately
before his death. The value transferred is the value of the deceased’s estate immediately before
his death.
Definition of estate under IHTA 1984 s5(1) – ‘all the property to which he was beneficially entitled
immediately before his death, with the exception of ‘excluded property’. Property included within
the definition falls into 3 categories:
1. Property which passes under the deceased’s will or intestacy – the deceased was beneficially
entitled to all such property immediately before he died.
2. Property to which the deceased was beneficially entitled immediately before his death but
which does not pass under his will or intestacy – this applies to the deceased’s interest in
any joint property passing on his death by survivorship to the surviving joint tenant(s).
3. Property included because of special statutory provisions – by statute, the deceased is
treated as being beneficially entitled to certain types of property which would otherwise fall
outside the definition. These rules apply to –
- Certain trust property; and
- Property given away by the deceased in his lifetime but which is ‘subject to a
reservation’ at the time of death.
Trust property included in the estate for IHT purposes –
In certain circumstances, a person who is entitled to the income from a trust is treated for IHT
purposes as beneficially entitled to the capital which produces that income. This means that where a
beneficiary is entitled to all the income from such a trust dies, the trust fund is taxed as if it were
part of the beneficiaries estate.
The type of beneficial interest covered is known as a ‘qualifying interest in possession’. To be an
interest in possession, it must be an interest under which the beneficiary is entitled to claim the
income from the trust property with no power on the part of the trustees to decide whether or not
he should receive it. An interest in possession which arises on or after March 2006 will only be
qualifying in limited circumstances.
Property outside the estate for IHT purposes –
Property in which the deceased did not have a beneficial interest - two common examples:
- Life assurance policy once it is written in trust for a named beneficiary (because the
proceeds are no longer payable to the deceased’s estate)
- Discretionary lump sum payment made from a pension fund to the deceased’s family
(because the pension trustees are not obliged to pay it to the deceased’s estate).
Excluded property - not part of the estate for IHT purposes
One example is a ‘reversionary interest’ - this means a future interest under a settlement, for
example an interest in remainder under a trust, created before 22 March 2006.
Example: In 2005, Faith created a trust for Guy for life, remainder to Hazel. Guy has a qualifying
interest in possession and Hazel has a reversionary interest (that is excluded property).
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