Prep 3 Inheritance Tax and Application for a Grant

Rate of Inheritance Tax

• Nil Rate Band - 0%

• Lifetime Rate - 20%

• Death Rate - 40%

IHT Trigger Events

• Potentially Exempt Transfers (PETs)

• Lifetime Chargeable Transfers (LCTs)

• Death

How are transfers of value assessed?

• For lifetime transfers, by reference to the loss in value to the donor

• For the death estate, by reference to the market value on the date of death

Nil Rate Band Amount

£325,000

Residence Nil Rate Band Amount

£175,000

When does a PET become chargeable?

If the transferor dies within 7 years of making the transfer

What is a Lifetime Chargeable Transfer?

A transfer into a trust on or after 22nd March 2006

Cumulative Total

Total chargeable value of all chargeable transfers made in the previous seven years

Transfer of a Basic Nil Rate Band

A surviving spouse may use the unused portion of the deceased’s basic NRB

TNRB and Multiple Spouses

The surviving spouse can claim the remainder NRB of all previous spouses subject to a cap of 100%

Requirements for Residence Nil Rate Band

• Died on or after 6th April 2017

• Death estate included a quantifying residential interest

• QRI was closely inherited by a direct descendant

Limits on RNRB

• Reduction of £1 for every £2 over the £2 million threshold

• Not available for estates of £2,350,000 or more

Qualifying Residential Interest

Any dwelling-house owned by the deceased which they did live or intended to live in

The meaning of Closely Inherited for RNRB

• A gift under the will

• By intestacy

• By survivorship

The meaning of direct descendants for RNRB

• Children, grandchildren, great children and other lineal descendants (including step/ adopted children)

• Spouse or civil partner of anyone included in the above

• Widow of any of the above provided they have not remarried

Downsizing rules for RNRB

• Deceased must have given away their QRI or downsized to a less valuable QRI on or after July 2015

• Former home would have been a QRI if retained

• Direct descendant inherited the replacement QRI

Maximum Combined NRB

£1,000,000 (£325,000 + £325,000 + £175,000 + £175,000)

Steps for calculating the Death Estate

1. Calculate Cumulative Total

2. Identify assets included in the taxable estate

3. Value the taxable estate

4. Deduct debts/ expenses

5. Apply exemptions & reliefs

6. Apply RNRB

7. Apply basic NRB and calculate tax

Assets which are included in the Taxable Estate but not the Inheritance Estate

• All jointly owned property

• Property subject to a reservation

• Donationes Mortis Causa

• Statutory nominations

• Some interests in possession (not in remainder)

Property not included in the Taxable Estate

• A remainder interests in a life interest trust

• Insurance policy written on trust

• Discretionary policy schemes

Valuing the Taxable Estate

Valued at the market value at the date of death subject to rules for Related and Joint Property

Related Property

Is valued higher as they form a set

Joint Property

Is valued lower to reflect the difficulty of selling a share of the property

Debts and Liabilities which can be deducted

• Debts or liabilities due at the date of death

• Reasonable funeral expenses and the cost of a tombstones

Common exemptions and reliefs under Inheritance Tax Act 1984

• Spouse exemption (s18)

• Charity exemption (s23)

• Gifts to political parties (s24)

• Family maintenance exemption (s11)

• Annual exemption (s19)

• Small gifts allowance (s20)

• Business property relief (s104)

• Agricultural property relief (s116)

Spouse exemption under s18 IHTA

Gifts made between spouses during life and following death are completely exempt

Charity exemption under s23 IHTA

All transfers to registered charities during life and following death are exempt

IHT Reduction for leaving estate to Charity

If the deceased leaves at least 10% of their estate to charity, their 40% rate is reduced to 36%

Gifts to political parties under s24 IHTA

Exempt from inheritance tax provided that:

• The party has at least 2 MPs elected

• The party had at least 1MP elected at least 150,000 votes for the party

Business Property Relief under ss103-114 IHTA

Reduces inheritable tax payable on qualified business property

Qualifying business assets

• Unquoted Shares

• Quoted Shares

• Business or interest in the business

• Assets owned by the taxpayer but used for bsuiess

Rates of Relief for BRP

• Unquoted Shares - 100%

• Quoted Shares - 50%

• Business or interest in a business - 100%

• Assets owned by a taxpayer but used for business purposes - 50%

Qualifying period of Ownership for BPR

Must be continuously for at least 2 years unless immediately replaced or inherited

Rates of Relief for APR

Agricultural Property Relief under ss115-124 IHTA

Reduces inheritance tax payable on the agricultural value of qualifying assets, this may not be the same as the market value

Qualifying Agricultural Property

• Agricultural land and buildings used for purposes connected with agricultural property

• Farm houses and cottages

Qualifying period for APR

• Occupied for at least two years; or

• Owned for at least 7 years

Reliefs only available on death

• Woodlands relief (s125 IHTA)

• Quick succession relief (s141 IHTA)

Assessing the value of Woodland Relief

With reference to the value of the timber, not the land itself

Quick Succession Relief under s141 IHTA

Applies where a person dies and:

• The death estate includes assets received by way of gift or inheritance

• In the 5 years before their death, and

• Assets were subject to inheritance tax when originally transferred

IHT Account

Should be delivered by form IHT 400 stating all of the property in the taxable estate and its value and any exemptions and reliefs that apply

Deadline for IHT

• 12 months for the account submission

• 6 months for payment of IHT

Instalment Option for IHT

May be in 10 equal annual instalments from 6 months after the deceased’s death

Excepted Estates from IHT 400

• Low Value Excepted Estate

• Exempt Excepted Estate

Low value excepted estate

Where there is:

• No IHT payable because;

• Gross value of the estate is below the NRB (RNRB cannot be claimed or the estate cannot be excepted)

Exempt Excepted Estate

Where:

• Gross value is no more than £3 million; but

• No IHT payable; because

• After debts deduced and spouse or charity exemption applied, the net value is below the NRB

Corrective Accounts and Form C4

Used to inform HMRC about:

• Any additional assets or liabilities discovered after IHT 400 was submitted

• Corrections to value of assets or liabilities

• CHanges to exemptions or reliefs

• Variation to the original beneficiary entitlement

Options for releasing funds to pay IHT

• Direct Payment Scheme

• Borrowing