Tax - Private Client

TAX:

1. Inheritance Tax [IHT] Checklist

IHT payable when the gift was made:

1. Does the gift carry with it any liability [e.g. mortgage / charge on shares]

2. Exemptions:

• spouse 100%

• charity 100%

• political party 100%

• Business property relief

• small gifts

• normal expenditure

• marriage

3. Annual exemptions [check dates]

4. Equals = Value of the PET / LCT

5. Gross up any LCT if donor is paying tax.

6. TAX:

• NB. No taper relief at this stage

• Valuation issues? [10% discount]

IHT payable on LCTs / PETs at date of death:

1. Transferable NRB?

2. “x dies on DATE. The 7 year period runs from DATE”

3. NRB transferable- transfer the appropriate % proportion not used

4. Work chronologically:

• First PET / LCT within the 7 year period – go back 7 years. Any LCT in that period will effect the cumulative total.

“This LCT is not reassessed but may be relevant to calculating the cumulative total for subsequent gifts. Cumulative total = x”

• PETs: “this PET was made within 7 years of death and must be assessed for tax.

The cumulative total = x + y

WHO pays?

• LCTs: “It was made within 7 years of death so should be re-assessed at full rate applicable to death.

Trustees pay x [take off anything already paid / no refund]

Gross up?

5. TAPER relief to PETs / LCTs

Value transferred on death:

1. Assets [valuation rules]

2. Liabilities [don’t include administration costs]

3. Reliefs [spouse / charity]

4. Free estate / estate passing under trust??

5. Tax

6. Taper relief

7. Reclaim loss relief on land / shares

Other issues:

• Estate rate?

• Interest in possession / discretionary trust ignore

2. Intestacy calculations

Estate passing on intestacy:

1. Assets x

2. Less: liabilities x

3. = new estate x

4. Spouse receives:

• Personal chattels absolutely X

• Statutory legacy [plus interest] X x

Residue = x

• A life interest in one half of residue x

5. Issue to receive:

• Other half of residue on statutory trust / absolutely x

[but subject to IHT if NRB is exceeded]

• On death of spouse, the fund which they have a life interest

Where the spouse has elected to capitalize the life interest:

1. Assets x

2. Less: liabilities x

3. = new estate x

4. Spouse receives:

• Personal chattels absolutely X

• Statutory legacy [plus interest] X

• Lump sum [capital life interest] absolutely X x

Remainder = x

5. Issue to receive:

• Issue receive the remainder absolutely / on statutory trust minus IHT

[Pay IHT if NRB is exceeded]

If issue are full age / capacity = they can agree the capital value of the redemption with spouse. If they do not have capacity capital value of the redemption must be calculated in accordance with Intestate Succession Order 1977.

NB. If issue die before attaining vested interest – distribute estate as though they had never existed. Spouse will be entitled to the capital being held by the issue –but will get a refund of IHT [x PLUS interest] – because of spouse exemption.

3. Tax Planning

Tax implications for Lifetime gifts:

Non-tax implications for lifetime gifts:

Life interest trusts – Anti-avoidance issues:

• Where tax payer makes a gift but continues to have use of the asset – [i.e. a “gift with reservation of the benefit” – he will not get the tax advantages. Instead, the IHT calculation is postponed until the reserved benefit is given up. The calculation is based on the then value of the asset.

• Income Tax is chargeable to pre-owner assets [i.e. assets which have been given away but which are still used by settlor]. The rules apply retrospectively!

Other tax planning devices: