Inheritance Tax Seminar By Zee Shan Smartfield Accountants In Leicester

Inheritance TaxIHT

18th May 2016

Presenter: Zee Shan

Content:1. Introduction to presenter2. New developments3. Lifetime gifts exemption4. IHT on death5. Exercises6. Help & Advice

Presenter: Zee Shan

Disclaimer:The contents of this seminar do not constitute advice. We can not be held responsible for any income or loss suffered as a result of acting or not acting after this seminar.

Presenter: Zee Shan

Introduction of the Presenter

Zee Shan Bawany CTA ACCA MAAT

Tax Manager

Smartfield Accountants

EducationQualification Centre

CTA (Chartered Tax Adviser) BPP Birmingham

ACCA (Association of Chartered Certified Accountants) De Montfort Uni

ATT (Association of Tax Technicians) FTC Birmingham

C & G 7407 Teacher Training Leicester College

AAT (Association of Accounting Technicians) Leicester College

BTEC National Diploma in Computing Leicester College

Smartfield Limited Tax Manager

Abbey Tax Plc Tax Consultant

Smith Hannah Ltd Head of Personal Tax

Leicester College Tax Lecturer

Employment

HobbiesHobbies

Hobbies

Hobbies

Hobbies

IHT is charged on :

a transfer of value

of chargeable property

by a chargeable person

IHT

Occasions of charge:

1. at death on estate value;

2. at death on lifetime gifts within last 7 years;

3. during lifetime on certain gifts.

IHT

Rate of IHT charges:

1. at death – 40%;

2. during lifetime – 20%

IHT

IHT NRB:

Nil Rate Band £325,000

IHT

From To Threshold/nil rate band

6 April 2009 5 April 2017 £325,000

6 April 2008 5 April 2009 £312,000

6 April 2007 5 April 2008 £300,000

6 April 2006 5 April 2007 £285,000

Inheritance Tax thresholds - from 18 March 1986 to 5 April 2017

IHT

New Developments

Family Home Allowance

This will be phased in from 06/04/2017 as follows:

Tax Year 2017-18 £100,000Tax Year 2018-19 £125,000Tax Year 2019-20 £150,000Tax Year 2020-21 £175,000

IHT

New Developments


Individuals will be able to pass on assets worth up to £500,000, including family home from Tax Year 2020-21, without paying any IHT.

For married couples and civil partners the combined figure is £1 million.

IHT

New Developments


Exception

Estate worth more than £2 million will lose the FHA on a sliding scale basis.

IHT

Basic: IHT

Chargeable Person

UK domiciled individuals and trustees are liable to IHT on transfer of their worldwide assets.

IHT

Excluded property

Some assets are excluded from IHT charge e.g. assets owned overseas by not UK domiciled individuals.

IHT

Diminution in value

Value of asset transferred is always measures as the diminution in value of the donor’s wealth (loss to estate), not the amount gained by the donee.

IHT

Diminution in value: Example

John owns 75% of an unquoted property investment company. He gives 30% to his son.

Shareholdings on the date of the gift were valued at:

Shareholding Value £

75% £500,000

45% £245,000

30% £125,000

IHT

Diminution in value: Example

Shareholding Value £Before transfer 75% £500,000

After transfer 45% £245,000

Diminution in value £255,000

IHT

Exempt PET CLT

Lifetime GiftsIHT

Lifetime: Exempt Gifts

There is no IHT payable on this category of gifts during lifetime, nor at death.

Even if the death is within 7 years of making the gift.

IHT

EXEMPT

Lifetime: Exemptions

1. Small gifts exemption2. Marriage exemption3. Normal expenditure out of income4. Annual exemption

IHT

EXEMPT


1. Small gifts exemption

Maximum £250 Per recipient Per tax year

If limit exceeded then exemption does not apply.

The donor can make gifts of up to £250 to any number of recipients and they will all be exempt.

IHT

EXEMPT



Example:

Jane gave £240 to her daughter.

Small gifts exemption applies to this gift.

IHT

EXEMPT



Example:

Dave gave £240 to her daughter. Then 3 months later gave another £150 in the same tax year.

Small gifts exemption will not apply to any of the two gifts above.

IHT

EXEMPT


2. Marriage exemption

£5,000 by a parent£2,500 by grandparent£2,500 by a party to the marriage£1,000 by anyone else

IHT

EXEMPT


2. Marriage exemption

Example:

Chris gave £4,000 to his grandson on his marriage.

Only first £2,500 will qualify for marriage exemption, the remainder of £1,500 will be treated as a PET.

IHT

EXEMPT


3. Normal expenditure out of income

Lifetime transfer will be exempt if it can be shown that the gift:

A) is made as part of a person’s normal expenditure out of income, and

B) does not affect the donor’s standard of living.

IHT

EXEMPT


3. Normal expenditure out of income

Gifts must be habitual with a regular pattern of giving.

ExampleSchool fee for a grandchildPaid for family holidays

IHT

EXEMPT


4. Annual Exemption

First £3,000 of lifetime transfers per tax year are exempt;

It is applied chronologically to the gifts made in a tax year;

Must be applied to the first gift each year, even if the first gift is a PET and may never become chargeable.

IHT

EXEMPT


4. Annual Exemption (AE)

Unused AE can be carried forward one tax year only;

Current year’s AE will be utilised first then the brought forward one will be used.

IHT

EXEMPT

Lifetime & Death: Exemptions

5. Inter spouse exemption6. Charity exemption7. Political party exemption

IHT

EXEMPT


5. Inter spouse exemption

Transfers between spouses and partners in a registered civil partnership are exempt.

If transferee is not UK domiciled then exemption is restricted to NRB (Nil Rate Band).

IHT

EXEMPT


6. Charity exemption

Gifts to UK registered charities are exempt from IHT, without any maximum limit.

If 10% or more of the death estate is gifted to charity then IHT at death is reduced to 36%.

IHT

EXEMPT


7. Political party exemption

Gifts to qualifying political parties are exempt from IHT, without any maximum limit.

IHT

EXEMPT

Death: Exemptions

8. NRB (Nil Rate Band)9. Transfer of NRB to surviving spouse

IHT

EXEMPT

Death: Exemptions

8. NRB (Nil Rate Band)

Current rate of NRB is £325,000.

IHT

EXEMPT

Death: Exemptions

9. Transfer of NRB (Nil Rate Band) to surviving spouse

If spouse or civil partner dies without fully utilising the nil rate band, then the surviving spouse is entitled to the unused percentage of the NRB at his or her death.

IHT

EXEMPT

Exempt PET CLT

Lifetime GiftsIHT

/

PET (Potentially Exempt Transfers)

A gift by an individual to another individual of any asset which causes diminution in the value to donor’s estate

IHT

PET


PET is exempt unless the donor dies within

7 yearsof making the gift.

IHT

PET


If the donor dies within 7 years of making the gift, then the done may need to pay IHT on the gift received.

IHT

PET


Examples of gifts:

Cash gift

Car to daughter on obtaining a driving licence, at third attempt.

IHT

PET

Exempt PET CLT

Lifetime GiftsIHT

//

CLT (Chargeable Lifetime Transfers)

This is a residual category, therefore gifts which are not Exempt and PET are considered CLT.

Transfers by an individual into a trust (other than charitable trust) are considered CLT.

IHT

PET


CLTs are taxable at the time of gift, if the cumulative value exceeds the NRB (Nil Rate Band)

20% IHT Rate if trustees agree to pay the charge

25% IHT Rate if the donor pays the charge

IHT

PET


The date of payment of lifetime IHT depends on the date of the gift:

IHT

PET

Date of CLT Due date of payment

6 April to 30 September 30 April in the following year

1 October to 5 April Six months after the end of the month of the CLT


If the donor survives 7 years after making the gift then there is no further IHT to pay.

IHT

PET


If the donor dies within 7 years of making the gift then there may be further IHT to pay by the trustees.

IHT

PET

Exempt PET CLT

Lifetime GiftsIHT

// /

After death

Gardens of paradise

IHT is payable at 40% on assets that exceed the NRB, various exemptions and reliefs.

IHT is payable within six months after the end of the month of death.

IHT

Death: Reliefs

The following reliefs are available:

1. BPR (Business Property Relief)2. APR (Agricultural Property Relief)3. Taper Relief

IHT

Reliefs

Death: Reliefs

1. BPR (Business Property Relief)

100% relief:Sole proprietor's business or partnership share.

Shares in an unquoted trading company.

50% relief:Quoted shares or securities in company of which transferor had voting control.

Land etc. owned by individual and used in partnership in which he is a partner, or a company which he controls.

IHT

Relief

Death: Reliefs


Shares do not qualify if company is investment company or company dealing in stocks and shares or land and buildings.

Minimum period of ownership: two years (original property) or two out of five years (replacement property).

IHT

Relief

Death: Reliefs


If PET becomes chargeable or additional tax is due on a CLT, two further conditions must be fulfilled for BPR to be available.

Donee must still own the original property at the date of the donor's death, or the donee's death if earlier.

Original property must still qualify as relevant business property at the date of the donor's death, or the donee's death if earlier.

Conditions fulfilled if the donee disposed of the original property but reinvested all of the disposal proceeds in replacement property within three years of the disposal.

IHT

Relief

Death: Reliefs

2. APR (Agricultural Property Relief)

Relief is available against the agricultural value of agricultural property.

Applies to property situated in EEA.

Rate of relief is 100%.

IHT

Relief

Death: Reliefs

3. Taper Relief

If gifts are made between three and seven years of death, death tax is reduced by taper relief.

Percentage of Taper Relief depends on the period between date of gift (PET/CLT) and death.

IHT

Relief

Death: Reliefs

3. Taper Relief Percentage

IHT

Period Percentage

0-3 0%

3-4 20%

4-5 40%

5-6 60%

6-7 80%

Relief

Deeds Of Variation

Terms of a deceased’s will can be altered by use of a deed of variation.

Deeds Of Variation

Main reasons for wishing to do this are:

- To include someone who has been left out of the will.

- To implement tax planning to reduce IHT.

Within two years of death by an instrument in writing.

Treat the rewritten will as if it had been the original will.

Applies both for IHT and CGT if the people making the variation specify in the variation that it is to have that effect.

Exercises

Exercise 1:

Adam died leaving behind the following to his children:

Main residency worth £200,000Bank balance of £10,000Car worth £3,000Lawnmower worth £5,000 Other small items worth £1,000

Calculate the amount of IHT payable.

Exercise 1:

Adam’s estate is covered by the NRB (Nil Rate Band) of £325,000 therefore there is no IHT payable.

Exercise 2:

Bob died leaving behind the following to his wife:

Main residency worth £200,000Bank balance of £100,000Rental property worth £150,000


Exercise 2:

Bob’s estate has transferred to the surviving spouse under the inter spouse transfers exemption, therefore IHT is not payable.

However when the surviving spouse dies then IHT calculation will be required.

Exercise 3:

Charles died leaving behind the following to a UK registered charity:

Main residency worth £500,000


Exercise 3:

Charles’s estate has transferred to a UK registered charity, therefore IHT is not payable.

Exercise 4:

Dave died leaving behind a gross chargeable estate valued at £427,000 all of which was bequeathed to his brother.

Calculate the amount of IHT payable, assuming that Dave made no lifetime transfers.

Exercise 4:

£ £Gross chargeable estate value 427,000

NRB @ date of death 325,000

Less: Gifts <7 yrs before death _ Nil

(325,000)

Taxable amount 102,000

IHT payable @ 40% 40,800

Exercise 5:

Edward died on 23 April 2015 leaving a gross chargeable estate valued at £627,560 which was bequeathed to his sister.

Edward had made the following lifetime gifts:

1 June 2006, £18,000 to a discretionary trust

16 March 2011, £288,000 to his cousin

Calculate the IHT liability arising on Edward’s estate and state the due date of payment.

Edward

IHT payable during lifetime

CLT PET01/06/2006 16/03/2011

£ £Transfer of value 180,000 228,000 Less: Annual exemption Current year 2006/07 (3,000) 2010/11 (3,000) Previous year 2005/06 b/f (3,000) 2009/10 b/f (3,000) Chargeable amount 174,000 222,000

NRB @ date of gift - 2006/07 285,000 Less: Gifts <7yrs before this gift Nil NRB available (285,000)

Taxable amount Nil Nil

IHT payable Nil Nil

IHT payable on death

Date of death: 23 April 20157 year before: 23/04/2008

CLT on 01/06/2006 is more then 7 years before death therefore no IHT is payable on that, at death.

£ £ £ £222,000 627,560

NRB @ date of death - 2015/16 325,000 325,000Less: GCT < 7 years before gift(16/03/2004 - 16/03/2001) -174,000

Less: GCT < 7 year before death -222,000(23/04/2004 - 23/04/2015)NRB available -151,000 -103,000Taxable amount 71,000 524,560

IHT payable @ 40% 28,400 209,824Less: Taper relief 4-5 years before death - 40% -11,360

IHT payable on death 17,040 209,824

Paid by Cousin ExecutorDue date of payment 31/10/2015 31/10/2015

Estate value23/04/2015

PET16/03/2011

SuccessionPlanning

Considerations at the time of transfer of property from an individual to another individual

1. CGT (Capital Gains Tax)2. VAT3. IHT (Inheritance Tax)4. SDLT5. Mortgage6. Accounting Treatment7. Future Income8. Subsequent Disposal

Practice Management Advice

Use a file naming structure which mirrors your hardcopy files.

Practice Management Advice

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Help & Advice

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Helpline0300 123 1072

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Inheritance Tax Seminar By Zee Shan Smartfield Accountants In Leicester