Template - Lifetime Chargeable Transfer - IHT PDF

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Template for a death estate Inheritance Tax calculation for the purposes of Wills and Administration of Estates exam....

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TEMPLATE FOR IHT CALCULATIONS – LCT     

Go through structure with EVERY transfer Always start with the OLDEST transfer Always consider death LAST Draw Death Line Any debts / liabilities / legacies are paid from the residue estate (e.g. bank accounts, cash, life assurance policies, any liquid assets) N.B FSMA -> wills 2 notes

STEP 1: Identify the transfer of value Lifetime transfer – Lifetime Chargeable Transfer (‘LCT’) (main examples – transfer to a COMPANY or to MOST TYPES OF TRUST N.B. NOT A DISABLED TRUST) N.B. you only pay the 20% tax on the date of the LCT if the nil rate band has been used up – see step 4 and look back 7 years. So you must go through this structure! STEP 2: Find the value transferred Lifetime transfers – the reduction in value of the transferor’s estate STEP 3: Apply any exemptions and reliefs Common examples: Death estate and lifetime transfers: Spouse/civil partner exemption – no IHT to be paid no matter the value (spouse and civil partners only, not cohabitees) (N.B. you can use partner’s exemption if they did not use, see step 4) Charity exemption – anything given to charity is completely exempt (N.B. the effect of this at the end) Business Property Relief – 100% relief = 1. Business/interest in business 2. UNQUOTED shares 50% relief = 1. QUOTED shares (must also have a controlling interest in company) 2. land/building machinery (must be owned by transferor but used in company) Time limit = must have been owned by transferor for at least 2 years at the time of the transfer. If inherited by spouse, deemed to have owned it from date originally acquired by deceased *Transferee must have shares at time of death for BPR to apply. If for example, they are sold, then they will be taxed like a PET on death. No clawback with BPR so can sell shares straight after you have received them in a will.

Annual exemption – £3,000 per tax year (can accumulate but up to 2 years only) Marriage exemption – 1. £5,000 by parent of party to marriage 2. £2,500 by a remoter ancestor of a party to marriage (e.g. grandparent) 3. £1,000 in any other case Normal expenditure out of income - all three of the following must be satisfied: 1. made as part of the transferor’s normal expenditure; 2. made from the transferor’s income; and 3. after such payments, the transferor was left with sufficient income to maintain usual standard of living Small gifts exemption – lifetime gifts in any one tax year of £250 or less. Cannot be set against a gift which exceeds £250 STEP 4: Calculate tax at the appropriate rate(s) LCT’s  nil rate band @ 0% up till £325k  Allow for CUMULATION (Look back 7 years to see if any LCT’s were made before the one you’re assessing and see if it’s eaten any nil rate band)  20% thereafter

However, this needs to be recalculated on death: 1. Look back 7 years to see if any LCT’s or PETS were made before the one you’re assessing 2. nil rate band @ 0% up till £325k (allow for CUMULATION and see if any nil rate band has been eaten) 3. 40% tax thereafter 4. Does tapering relief apply?  3-4 years before death = 80% of death charge  4-5 years before death = 60% of death charge  5-6 years before death = 40% of death charge  6-7 years before death = 20% of death charge 5. Credit back any tax that was paid when the transfer was made during lifetime Death estate – Residence nil band rate. The following must be satisfied for this to apply: 1. “Qualifying residential interest” (the deceased’s residence and form part of the estate) AND 2. “Closely inherited” (lineal descendant, spouse of a lineal descendant, widow of lineal descendant unless they remarried before deceased death)  Residence nil rate band rate @ 0% up till £175k (N.B. this can be passed on if not used by spouse, so can potentially be £350k)  40% thereafter Large charitable donation?

When large charitable donations are made (being at least 10% of the ‘baseline amount’ of a defined ‘component’ of a person’s estate), the rate of 40% is replaced by a rate of 36%....