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Taxation Of An Estate Notes

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Taxation of an estate 1) Calculate the cumulative total

1) Total of Chargeable transfers

PETs

Refer to Dates grid!

Transfer was within 7 years of death of transferor


This is a failed PET, it becomes chargeable and will affect cumulative total


April 2007 - £20,000

Transfer was over 7 years of death of transferor


This PET was successful and therefore does not contribute to cumulative total


April 2007 - £0

LCTs

Transfer was within 7 years of death of transferor


This is a chargeable transfer and will affect the cumulative total

Cumulative total April 2008 - £50,000

Tax payable on date of transfer on amount over the nil rate band


20%

Recalculation of tax rate on death


40%

Transfer was over 7 years of death of transferor


This is a chargeable transfer and will affect the cumulative total

Cumulative total April 2008 - £50,000

Tax payable on date of transfer on the amount over the nil rate band


20%

2) Less lifetime exemptions

1) Family maintenance - s.11 IHTA 1984


Made in favour of a child for their maintenance, education or training

2) Spousal exemption - s.18 IHTA 1984


Gift can be conditional as long as condition is satisfied within 12 months

3) Annual exemption - s.19 IHTA 1984


£3000 exemption on chargeable transfers (LCTs or failed PETs)


Can apply 2 years of annual exemption - the current year and then the previous year (total of £6000)

Spousal exemption does apply to: a) All life interest trusts created on death where the spouse is the life tenant; and b) Life interest trusts, created during life, before 22nd March 2006, where the spouse is the life tenant c) Absolute transfers between spouses / civil partners

Spousal exemption does NOT apply to: a) Life interest trusts where the spouse is in remainder; and b) Life interest trusts, created during life, created on or after 22nd March 2006 where the spouse is the life tenant

4) Small gifts - s.20 IHTA 1984


Applies to gifts of value up to £250 made to any person or to multiple people


Cannot be used in conjunction with the annual exemption

5) Normal expenditure out of income - s.21 IHTA 1984

6) Gifts in consideration of marriage and civil partnership - s.22 IHTA 1984


Applies to each donor, not donee, so cannot double up (£5000 + £1000)


Can be used in conjunction with annual exemption


Amounts:

a) £5000 if made by a parent of a party to the marriage / civil partnership

b) £2,500 if made by a remoter ancestor of one of the parties (e.g straight line up family à grandparent, great grandparent)

c) £1,000 in any other case (e.g. to nephew, niece, or family friend) 7) Charity exemption - s.23 IHTA 1984


All transfers to charity are completely exempt


Must be immediate and not in remainder


Gift can be conditional as long as condition is satisfied within 12 months

8) Business property relief - s.103-114 IHTA 1984 Available where a business / business property has been owned for 2 years or more prior to the transfer (or where a spouse inherits this property under a will and it has been owned for any period before transfer) at the following rates:

100%
a) For transfer of a business or interest in a business (e.g. business of a sole proprietor or a partner's interest in a business); or b) For transfer of shares in an unquoted company

50%
a) Shares in a quoted company which gave the transferor control of the company; or b)Transfer of land, buildings, plant or machinery used for the purpose of a business carried on by either: 1) A company (quoted or unquoted) of which the transferor has control; or 2) By a partnership of which the transferor was a partner

9) Agricultural property relief - s.115-124 IHTA 1984 Available in respect of the transfer of agricultural property, including land, pasture and agricultural buildings which has been: a) Occupied by the transferor for agricultural purposes for 2 years or more prior to the transfer; or b) Owned by the transferor throughout the 7 years immediately before the transfer and it was occupied by someone for agricultural for those 7 years

100%
a) Where the transferor was the owner or tenant in possession; or b) The transfer has the right to obtain vacant possession within 12 months; or c) The transfer is after 1 September 1995, and none of the above can be satisfied because of a new tenancy (lease) granted on or after 1 September 1995

50%
All other qualifying agricultural property

2) Identify the taxable death estate

General rule

All assets the deceased was beneficially entitled to at death are included in the estate for IHT

Property not included in the estate for IHT

1) Excluded property

a) Property situated outside the UK where the person beneficially entitled to it is domiciled outside the UK

b) Property where the deceased is a Remainderman and on their death the life tenant is still alive and receiving income The property has not vested and will therefore not be included

2) Insurance policies

a) Simple life insurance policy Will pass into estate for IHT

b) Insurance policy written in trust Where the benefit of the policy is written in trust for another, the proceeds will not pass into the estate for IHT

3) Pension scheme benefits

a) Non-discretionary pension Will pass into estate for IHT

b) Discretionary pension scheme If the contributor nominates the trustees to discretionarily pay the benefit of the pension to third party on the contributor's death the proceeds will not pass into the estate for IHT

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