#13765 - Tax - Private Client

Inheritance Tax [IHT] Checklist

IHT payable when the gift was made:

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

spouse 100%
charity 100%
political party 100%
Business property relief
small gifts
normal expenditure
marriage

Annual exemptions [check dates]
Equals = Value of the PET / LCT
Gross up any LCT if donor is paying tax.
TAX:

PET	No IHT payable The PET is ignored while Peggy is alive The value of the PET does not affect the Cumulative Total
LCT 1	NRB in the YEAR of the gift Tax at 20% if it exceeds the NRB
LCT 2	NRB Option 1: “The LCT1 made more than 7 years before LCT 2. The PET is ignored therefore the whole NRB is available [check NRB table of that year]” NRB option 2: “The LCT1 was made in the last 7 years before LCT2 therefore it effects the NRB available. The NRB is now [NRB of this year – cumulative total]”

LCT 1

NRB in the YEAR of the gift
Tax at 20% if it exceeds the NRB

LCT 2

NRB Option 1: “The LCT1 made more than 7 years before LCT 2. The PET is ignored therefore the whole NRB is available [check NRB table of that year]”
NRB option 2: “The LCT1 was made in the last 7 years before LCT2 therefore it effects the NRB available. The NRB is now [NRB of this year – cumulative total]”

NB. No taper relief at this stage
Valuation issues? [10% discount]

IHT payable on LCTs / PETs at date of death:

Transferable NRB?
“x dies on DATE. The 7 year period runs from DATE”
NRB transferable- transfer the appropriate % proportion not used
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?

TAPER relief to PETs / LCTs

Value transferred on death:

Assets [valuation rules]
Liabilities [don’t include administration costs]
Reliefs [spouse / charity]
Free estate / estate passing under trust??
Tax
Taper relief
Reclaim loss relief on land / shares

Other issues:

Estate rate?
Interest in possession / discretionary trust ignore

Intestacy calculations

Estate passing on intestacy:

Assets x
Less: liabilities x
= new estate x
Spouse receives:

Personal chattels absolutely X
Statutory legacy [plus interest] X x

Residue = x

A life interest in one half of residue x

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:

Assets x
Less: liabilities x
= new estate x
Spouse receives:

Personal chattels absolutely X
Statutory legacy [plus interest] X

Lump sum [capital life interest] absolutely X x

Remainder = x

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:

	Outright Gift	Gift into a Trust
		Life interest Trust: does not pass under the will of the life tenant. Discretionary Trust: Nominated Beneficiaries only have an “expectation”. No Interest in possession.
IHT Payable	PET: no IHT payable if the donor survives the gift by 7 years.	Lifetime Trust [set up after 22^nd March 2006] = LCT. Tax is payable [at 20%] if settler’s NRB is exceeded.
CGT Payable	Yes! PET is treated as a disposal at market value. A chargeable asset. [NB. There is NO CGT payable for chargeable assets passing under taxpayer’s will] If asset is likely to significantly increase – better to get it out of estate and pay CGT. If not, keep it within estate and give as a gift under the will.	Holdover relief for chargeable [non-business] assets places in a life-time trust. [ADVANTAGE over outright gift]. If no more than the NRB is placed into the trust - there is no IHT or CGT to pay!

Life interest Trust: does not pass under the will of the life tenant.
Discretionary Trust: Nominated Beneficiaries only have an “expectation”. No Interest in possession.

IHT Payable

PET: no IHT payable if the donor survives the gift by 7 years.

Lifetime Trust [set up after 22^nd March 2006] = LCT. Tax is payable [at 20%] if settler’s NRB is exceeded.

CGT Payable

Yes! PET is treated as a disposal at market value. A chargeable asset.

[NB. There is NO CGT payable for chargeable assets passing under taxpayer’s will]

If asset is likely to significantly increase – better to get it out of estate and pay CGT. If not, keep it within estate and give as a gift under the will.

Holdover relief for chargeable [non-business] assets places in a life-time trust. [ADVANTAGE over outright gift]. If no more than the NRB is placed into the trust - there is no IHT or CGT to pay!

Non-tax implications for lifetime gifts:

Trust in preference to outright gift

Discretionary trusts = where beneficiaries are different ages and have competing needs for funds cannot yet be foreseen. [i.e. very young! One beneficiary has special needs – difficult to know what they need] Family difficulties.

Letter of wishes to trustees – to set out priorities

Life interest trust = appropriate for second marriages! [New spouse is life tenant; children of first marriage get capital inheritance]

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:

Skipping a generation	Making a gift to grandchildren instead of children. Why is it Tax efficient: do not increase the size of the child’s estate [avoid two taxes]
Deeds of variation	A tool which allows beneficiaries under the will the power to re-direct property to others in greater need. Variation = a direction given by original Beneficiary to the deceased’s PRs to transfer property to which he/she is entitled under the will / intestacy to someone else. Usually by Deed / should be in writing [PRs; B1 and B2 parties to the agreement] Could result in more IHT being paid – PRs can refuse the variation if there is not enough assets to pay the IHT. Variation still possible even if B1 has accepted some benefit from the property. Partial variation is possible What property can / cannot be varied or disclaimed: CAN: Any dispositions of property making up the estate immediately before death. [Includes Joint property] CANNOT: property in which the deceased has an interest in possession immediately before death e.g. life tenant under a trust! Does not form part of the estate of the deceased.
Disclaimers	B1 relinquishes ownership of the asset. Must not have taken any benefit from the property [right to disclaim is lost once B1 has accepted any benefit] Cannot disclaim part of a single gift Can disclaim one of several gifts Effect of disclaimer = property will pass as if the disclaiming beneficiary had predeceased the testator / intestate. Where does the gift go: [disclaiming B has no control over this!] Pecuniary gift / specific gift residue Residue intestacy Joint Tenant / class Other JT / remainder of class NB. If disclaiming B wants to benefit someone in particular – a deed of variation is more appropriate. How to disclaim: Inform PRs – orally or in writing Unilateral offer – no consent from PRs is required for it to be effective.
IHT / CGT implications	The variation / disclaimer MUST be made within 2 YEARS of the deceased’s death AND not made for any CONSIDERATION in money / money’s worth. Variations only: must contain a declaration of intention [intention that it should be effective for IHT purposes] by the beneficiary who wishes to vary the will. If this is not complied with – it is treated as if the Beneficiary is making a PET / LTC and will be charged IHT and CGT accordingly.
Income Tax Payable	Income received BEFORE the disclaimer / variation has been made will be taxed as that of the original Beneficiary. Once the variation / disclaimer has been made - new beneficiary will be liable for tax on income produced by the property concerned. Position where there has been a VARIATION and the new beneficiary is UNMARRIED, MINOR CHILD of the original beneficiary parent [i.e. B1] remains liable for income tax provided that the income is OVER 100.00]. This is an anti-avoidance provision.
SDLT / Stamp Duty	Disclaimer = non to pay Variation after 01.05.87: non to pay Variation before 30.Nov 2003 = variation has to be certified as exempt from SD.

Guidance notes for Tax Planning:

Clients = 2 parents with children! Want to tax plan but also have a decent standard of living!

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#13765 - Tax - Private Client

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