Wills & Administration of Estates

LPC Exam Revision

Inheritance Tax

When is IT Payable?

All transfers of value are subject to IT unless it is exempt. IH can be paid during a lifetime as well as after death.

There are three kinds of chargeable transfer:

1. Potentially Exempt Transfers (‘PET’)

A PET is made by a person during their lifetime to another person. No IT is payable at the time of the PET nor if the transferor survives for 7 years after the PET. IT is payable if the transferor dies within 7 years of the PET at a rate of 40% above the threshold (see below).

2. Lifetime Chargeable Transfers (‘LCT’)

A LCT is a transfer to another person into a trust. IT is payable at the time of the LCT at 20% above the threshold. If the transferor survives 7 years after the LCT the no further tax charges are made. If the transferor dies within 7 years of the LCT then the tax liability is reassessed at the death rate of 40%.

3. Death

When a person dies then the person’s estate will be taxed at 40% above the threshold.

The threshold is 325,000. Everything below this figure is not taxed; everything above this figure is taxed as detailed above.

IT can be reduced on death to 36% if a person leaves 10% of their net estate to charity.

Cumulative Total & Thresholds

HMRC considers all IT transfers made the in 7 years before death.

Cumulative Total = Total Chargeable Value of all Chargeable Transfers made in the past 7 years.

Work out the cumulative total before working out the threshold.

Threshold = 325,000 - Cumulative Total

Cumulative Total : 0

Cumulative Total = 0

(PET only taxed if fails)

Cumulative Total = PET/

LCT total

325,000 – Cumulative Total

Below Threshold: 0%

Above Threshold: 40%

Exemptions & Relief

LCTs & Failed PETs

Exemptions
Annual Exemption	3,000 taken off each year on gifts. This amount can be carried forward, if it is the first transfers then allow 6,000. Carrying the amount forward can only be done for one year (i.e. 6,000 maximum) and the current tax year must be used first, the previous year’s leftovers, if any, can only be used when the current year has been used up.
Small Gift Allowance	Multiple gifts of 250 per person each tax year.
Normal Expenditure	Transfers out of income as a regular pattern of giving which do not affect the donor’s standard of living are exempt.
Marriage Gifts	Gifts made in contemplation of a particular marriage can be made by individuals up to their specified amount: - Parents of the couple: 5,000 per parents (i.e. potentially up to 20,000); - One of the couple or remote ancestor such as a grandparent: 2,500 each - Any other person: 1,000
Family maintenance	Maintenance payments are exempt if they are made to a spouse or former spouse or a connected child or dependent relative.
Reliefs
Taper Relief	Taper relief reduces the amount of IT payable; it does not reduce the chargeable value of the failed PET or LCT. The transferor must have died within 7 years of making a LCT or PET, IT must be due and the transferee must survive the transferee by at least 3 years. Date of Transfer Up to 3 years prior to death \| No Change 3 - 4 years prior to death \| 20% reduction 4 - 5 years prior to death \| 40% reduction 5 - 6 years prior to death \| 60% reduction 6 - 7 years prior to death \| 80% reduction

LTCs & Failed PETs

Charity Exemption

All transfers to charities doing lifetimes are exempt as long as the gift is used exclusively for the purpose of the charity.

Agricultural

Property Relief

This applies to agricultural buildings and land (e.g....

Inheritance Tax - Private Client

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