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AF1: IHT

AF1: IHT. 2019/20. A simple tax?. Peter dies leaving an estate of £825,000. Calculate the amount of IHT that will be payable. What is the chargeable estate?. Chargeable Estate £825,000 Less NRB £325,000 Taxable estate £500,000. How does the estate qualify for the 36% rate.

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AF1: IHT

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  1. AF1: IHT 2019/20 Audley Financial Training

  2. A simple tax? Peter dies leaving an estate of £825,000. Calculate the amount of IHT that will be payable What is the chargeable estate? Chargeable Estate £825,000 Less NRB £325,000 Taxable estate £500,000 How does the estate qualify for the 36% rate Will the available NRB always be £325,000? £500,000 @ 40% = £200,000 Audley Financial Training

  3. Calculating the value of the deceased’s estate • Everything owned by the deceased • Joint assets split 50/50 • Include loans • life policies not in trust • Uncrystallised pension and drawdown funds can be ignored • Less any liabilities or debts of the deceased • Reasonable funeral costs can also be deducted Audley Financial Training

  4. Chargeable Estate Total Estate Less Exempt transfers Less IHT Reliefs Business Property Relief Agricultural property Relief Equals chargeable estate Audley Financial Training

  5. Calculation Audley Financial Training

  6. IHT Reliefs • Business Property Relief • Agricultural Property Relief • Quick Succession Relief Deducted from the estate Deducted from the estate’s IHT liability Audley Financial Training

  7. Business Property Relief • Value of business is added to the estate and then deducted from it • To qualify for 100% relief • it must be a trading business • The business/asset must have been owned for 2 years • Shares in unlisted companies qualify for BPR • Shares listed on the AIM also qualify for BPR • 50% relief is given on listed shares if the owner had 50% of the voting rights Audley Financial Training

  8. Fred died with an estate of £900,000 and in addition he owned a business with a value of £300,000. (Qualifies for BPR) Audley Financial Training

  9. Agricultural Property Relief Audley Financial Training

  10. To qualify • It must be a working farm in the UK, Channel Islands, the IOM or in the EEA. • It must be owned for at least two years if occupied by the owner, a company controlled by them or their spouse or civil partner. • It must be owned for 7 years if occupied by someone else Audley Financial Training

  11. Taxable estate Chargeable Estate LESS Available Nil Rate Band = Taxable estate Audley Financial Training

  12. Working out the NRB Transfer of unused NRB from pre-deceased spouse/CP £325,000 PET/CLT made in 7 years before death Audley Financial Training

  13. Rules for transferable NRB • First death can have occurred at any time • Couple must have been married at time of first death. • Calculate percentage of NRB not used by first death • Apply to current NRB • Executors have two years to claim NRB Audley Financial Training

  14. How to work out transferable NRC • Len died when the NRB was £250,000 • He left £100,000 to his children and the remainder to his wife • He used 40% of his NRB • £100,000/£250,000 • His wife died in 2019/20 • Her executors can claim 60% of the current NRB • £325,000 x 60% = £195,000 • The NRB is £325,000 + £195,000 = £520,000 Audley Financial Training

  15. More than one pre-deceased spouse • Unused NRB can be transferred from more than one spouse • But the maximum that can be transferred is 100% • Jane had two husbands who died before her. • The first used 75% of his NRB • The second used 40% • Her estate can claim 85% Audley Financial Training

  16. The three types of lifetime gifts Will never be subject to IHT No impact on NRB Exempt No IHT payable when gift is made Reduces NRB for 7 years after the gift was made Potentially Exempt Transfer Could be subject to IHT when the gift was made Reduces NRB for 7 years after the gift was made Chargeable Lifetime Transfer Audley Financial Training

  17. Lifetime Exempt Transfers • £3,000 annual exemption • £250 small gifts • Gifts on marriage • Gifts to spouses/civil partners • Gifts to charities/political parties • Gifts out of normal expenditure Audley Financial Training

  18. Annual Exemption • £3,000 to one person: exempt • A gift of £2,000 to one person, £1,000 to another person: both exempt • Six gifts of £500 to different people: all exempt. • “No previous gifts made” means that the annual exemption doubles to £6,000 as last year’s unused relief can be carried forward Audley Financial Training

  19. Small gifts exemption • Unlimited gifts of £250 to different individuals: all exempt • 1 gift of £251 would use up part of the annual exemption. • Cannot combine small gifts with annual exemption • Therefore 1 gift of £3,250 would use up the £3,000 annual exemption but £250 would not be exempt Audley Financial Training

  20. Gifts on marriage • Amounts in the tax tables given in the exam • Can be combined with the annual exemption • Parent, assuming no previous gifts, can gift £11,000 which would be exempt • £6,000, two annual exemptions • PLUS £5,000 marriage gift exemption Audley Financial Training

  21. Gifts out of normal expenditure There are three tests that must be met to qualify Income Regular Not affect standard of living Audley Financial Training

  22. Reducing NRB with PET/CLT £175,000 £325,000 £75,000 Nil £105,000 £145,000 £45,000 £100,000 £120,000 £60,000 £150,000 1/7/21 1/7/11 1/7/14 1/7/18 1/7/19 1/7/16 Audley Financial Training

  23. PET/CLT plus Annual Exemption Father makes £10,000 gift to daughter, having made no previous gifts £4,000 PET £6,000 exempt Audley Financial Training

  24. Death transfer with PET Peter was single when he died and had an estate of £400,000. Five years earlier he gifted £100,000 to his nephew. Calculate the IHT that would be payable Audley Financial Training

  25. Death transfer with PET (2) Rachel was divorced and made a gift of £400,000 to her son in June 2017. She made no other gifts. Rachel died in July 2019 and her estate was £400,000 Audley Financial Training

  26. Taper relief • PET & CLT reduce the NRB. • When NRB is exhausted the recipient becomes liable. • It reduces tax payable by recipient • Does not reduce the amount of the gift • No reduction if death occurs within 3 years of gift. • Then a reduction of 20% for each year until there is an 80% reduction in the final year Audley Financial Training

  27. Don gave £240,000 to Betty in September 2012 and £200,000 to Charlie in May 2016. No other gifts had been made. He dies in August 2019 with an estate of £600,000 Audley Financial Training

  28. Rules for dealing with PET/CLT on death • They reduce the NRB • They are not added to the estate • They are dealt with in chronological order starting with the earliest first • If the NRB is exhausted the excess becomes chargeable on the recipient. • Taper relief can be used to reduce the tax payable by the recipient. Audley Financial Training

  29. PETS in more detail • A gift that is made to a person that is not exempt • Also a gift to a bare trust • No tax is payable at time of gift, regardless of the amount of the gift • Becomes exempt if donor alive 7 years after making gift Audley Financial Training

  30. Interaction of CGT and PET • A man age 72 has an extensive investment portfolio • He wants to give some of this to his children,. • Should this be done now or wait until he dies and leave it to them in his will? • A gift now will incur CGT but as it is a PET, if he lives to 79 it would be exempt. • If he dies before then it will be taken into account in calculating the IHT liability but if he passes it on in his will, there would be no CGT but it would be part of his estate. Audley Financial Training

  31. Gifts with reservation To try and avoid IHT they transfer ownership to their two sons but agree that they can continue to live there and pay a nominal rent Dan and Doris own a house worth £3m. This is their only significant asset 10 years later the last parent dies. The house is worth £4m. What is the situation as regards IHT? Audley Financial Training

  32. And the answer is…. • It would be regarded as a Gift with Reservation (GWR) as the parents were benefiting from the right to live there at a low rent. • It would not be a PET and would never become exempt no matter how long the parents lived. • The sons would be the legal owners but the house would be part of the deceased’s estate and the value would be £4m • If the son’s decided to sell the house it would be subject to CGT on the difference between the sale price and the value at date of transfer. • They could not claim PPR Audley Financial Training

  33. CLTs in more detail • Now a gift to most trusts • Can use with annual allowance in the same way as a PET • Tax may be payable at time of gift • 0% on first £325,000, then 20% on excess • Payable by trustees, if paid by donor rate is 25%. • If donor survives 7 years then the gift becomes exempt • Gifts are cumulated over 7 years Audley Financial Training

  34. Lifetime Tax (Trustees pay) • Bob makes a gift of £625,000 into a discretionary trust (assume annual exemption has been used) • This is £300,000 above the NRB • The trustees are liable to pay tax @20% on £300,000 = £60,000 Audley Financial Training

  35. Lifetime Tax (Donor pays) • Bob makes a gift of £625,000 into a discretionary trust and agrees to pay the tax • Taxable gift is grossed up £300,000/0.8 = £375,000 • He liable to pay tax @20% on £375,000 = £75,000 • Gross gift is £700,000 • Alternative method £300k @ 25% = £75,000 Audley Financial Training

  36. CLT cumulation £200K + £60K = £260K Below NRB therefore no tax £325K + £60K = £385K less £325K = £60K @ 20% = £12,000 £300K + £325K = £625K less £325K = £300,000 @ 20% = £60,000 No tax: below NRB £200,000 £325,000 £60,000 £300,000 1/8/19 1/7/10 1/7/18 1/7/12 Audley Financial Training

  37. CLT tax on death Audley Financial Training

  38. Extra rules for dealing with CLT on death • Original CLT reduces NRB • If NRB is exhausted trustees are charged at 40% on the excess • Taper relief can be used to reduce the tax • The trustees can then offset any lifetime tax • But if lifetime tax paid is more than death tax after taper there is no refund Audley Financial Training

  39. IHT :the 14 year rule Audley Financial Training

  40. The basic principle A CLT (not a PET) made between 7 and 14 years before death cast a “shadow” for 7 years after it was made If the CLTs shadow catches a CLT or failed PET in the 7 years before death, the NRB available to the recipient of the gift is reduced by the value of the CLT Only PET/CLT made in the 7 years before death reduce the NRB available to the estate PET/CLT outside the CLT’s shadow are not affected Death 14 years 7 years CLT Audley Financial Training

  41. The 14 year rule Estate £325,000 less £300,000 = £25,000 NRB Trustees £325,000 less £200,000 less £300,000 = £175,000 @ 40% = £70,000 CLT £300,000 CLT £200,000 Death 1/11/19 1/10/15 1/12/09 1/12/09 1/11/12 Audley Financial Training

  42. What happened when the CLT were made? • First CLT of £200,000 made on 1/12/09. No tax • The second CLT of £300,000 was made October 1 2015 • Under the 7 year cumulation rule the earlier CLT of £200,000 would have to be taken into account. • The first CLT used up £200K of the NRB leaving £125K • The second CLT would have used up this £125K and £175K would be chargeable • £175,000 @ 20% = £35,000 Audley Financial Training

  43. Death calculation on second CLT recipient Audley Financial Training

  44. CLT made before PET The PET fails and becomes effectively a CLT £325,000 less £300,000 =£25,000 NRB But does the recipient have anything to pay? We must therefore look back 7 years to 1/09/09 to see if there any CLT CLT £200,000 PET £300,000 Death 1/11/19 1/12/10 1/09/09 1/11/12 1/09/16 Audley Financial Training

  45. Calculation of IHT on PET recipient Audley Financial Training

  46. CLT made before PET (2) Estate still has £25,000 NRB CLT wipes out the NRB available to the 2016 PET CLT £600,000 PET £300,000 Therefore £300,000 @ 40% = £120,000 Death 1/11/19 1/12/10 1/12/09 1/11/12 1/12/16 Audley Financial Training

  47. PET made before CLT This is correct When the CLT was made the PET would not have been taken into account £325,000 less £300,000 =£25,000 NRB No charge on recipient? CLT £300,000 PET £200,000 Death 1/11/19 1/12/10 1/12/09 1/11/12 1/12/16 Audley Financial Training

  48. But watch out for this one But the CLT “shadow” can only use the single NRB of £325,000 On Judith’s death her executors claimed 100% of her late husband’s NRB giving the estate £650,000 The CLT uses up £200,000 leaving £125,000 She had made a PET of £400,000 four years before her death and a CLT of £200,000 three years before that The PET recipient will be taxed on £275,000 The estate will have a NRB of £250,000 (£650k less £400,000) Audley Financial Training

  49. Process • If there is a PET or CLT in the 7 years before death • Look back 7 years from the date of the gift to see if there was a CLT made seven years before death • If there was deduct both the PET/CLT made in the 7 years before death and the earlier CLT from the standard NRB of £325,000 • If NRB is used up, the recipient is charged at 40% on the excess but liability cannot be more than 40% of the total gift • Taper relief and any tax paid at the time of the first gift can be deducted. Audley Financial Training

  50. Getting the 36% rate Audley Financial Training

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