LPC NOTES
[TAXATION]
(2019-2020)
, TAXATION
Inheritance tax
Inheritance Tax Act 1984 (IHTA 1984).
Taxed on:
on death;
on lifetime gifts made to individuals within seven years prior to death; and
on lifetime gifts to a company or into a trust.
Inheritance tax is charged on ‘the value transferred by a chargeable transfer’.
‘chargeable transfer’ is defined as ‘a transfer of value which is made by an individual but is not
an exempt transfer’ (IHTA 1984, ss 1, 2).
General calculation
Step 1: Identify the transfer of value
Any disposition which reduces the value of the transferor’s estate. On death, tax is
charged as if the deceased had made a transfer of value of his estate.
Step 2: Find the value transferred
Lifetime transfer, this is the amount of the reduction in the transferor’s estate.
Death, it is the value of the estate.
Step 3: Apply any relevant exemptions and reliefs
Various exemptions and reliefs exist for public policy reasons.
Step 4: Calculate tax at the appropriate rate
zero per cent. - ‘nil rate band’ (currently £325,000).
Rate in excess of the nil rate band varies according to the type of transfer.
The nil rate band will not neccessarily be available in full (or at all) for any given transfer.
Cumulation – Any chargeable transfers made by transferor during that period must be
taken into account to determine how much of the nil rate band remains available.
TRANSFERS ON DEATH
Step 1: Identify the transfer of value
The value transferred is
The value of the deceased’s ‘estate’ immediately before his death.
Definition of ‘estate’
IHTA 1984, s 5(1) - all property to which he was beneficially entitled immediately
before his death, with the exception of ‘excluded property’.
(a) Property which passes under the deceased’s will or on intestacy.
The deceased was ‘beneficially entitled’ to all such property immediately
before he died.
(b) Property to which the deceased was ‘beneficially entitled’ immediately before his
death but which does not pass under his will or on intestacy.
Deceased’s interest in any joint property passing on his death by
survivorship to the surviving joint tenant(s). The deceased will be taken to
have owned an equal share in the property with the other joint tenant(s).
(c) Property included because of special statutory provisions.
(i) certain trust property; and
, (ii) property given away by the deceased in his lifetime but which is ‘subject
to a reservation’ at the time of death.
Trust property included in the estate for IHT purposes
If entitled to the income from a trust - ‘beneficially entitled’ to the capital which
produces that income - trust fund taxed as if it were part of the beneficiary’s estate.
‘qualifying interest in possession’.
must be an interest under which the beneficiary is entitled to claim the income from
the trust property (or enjoy trust property) with no power on the part of the
trustees to decide whether or not he should receive it.
On/after 22 March 2006, qualifying interest in possession in limited circumstances.
‘immediate post-death interest’ (IPDI) - an interest in possession arising on the
death of the settlor under his will or intestacy.
Property subject to a reservation
The Finance Act 1986 - give property away more than 7 years before death but
continuing to enjoy the benefit of the property.
Deceased gave away property during lifetime but did not transfer ‘possession and
enjoyment’ of the property/was not entirely excluded from enjoying the property.
If property reserved - ‘beneficially entitled’.
Property outside the estate for IHT purposes
life assurance policy once it is written in trust for a named beneficiary.
discretionary lump sum payment made from pension fund to the deceased’s family.
Excluded property
Certain property which would otherwise be included in the estate for IHT purposes
Excluded property is not part of the estate for IHT purposes.
‘reversionary interest’- a future interest under a settlement (an interest in
remainder under a trust).
EXAMPLE - In 2000, Faith created a settlement placing £500,000 on trust for Guy for
life, remainder to Hazel absolutely. Whilst both Guy and Hazel are alive, Guy has a
qualifying interest in possession and Hazel has a reversionary interest (that is
excluded property).
Step 2: Find the value transferred
Basic valuation principle
‘the price which the property might reasonably be expected to fetch if sold in the
open market’ immediately before the death (IHTA 1984, s 160).
The value of an asset agreed for IHT purposes is known as the ‘probate value’.
Modification of the basic valuation principle: s 171
IHTA 1984, s 171 - where the death causes the value of an asset in the estate to
increase or decrease, that change in value should be taken into account.
Valuing quoted shares
The value of quoted shares is taken from the Stock Exchange Daily Official List for
the date of death (or the nearest trading day).
The list quotes two prices. To value the shares for IHT, take one-quarter of the
difference between the lower and higher price and add it to the lower price.
Debts and expenses
[TAXATION]
(2019-2020)
, TAXATION
Inheritance tax
Inheritance Tax Act 1984 (IHTA 1984).
Taxed on:
on death;
on lifetime gifts made to individuals within seven years prior to death; and
on lifetime gifts to a company or into a trust.
Inheritance tax is charged on ‘the value transferred by a chargeable transfer’.
‘chargeable transfer’ is defined as ‘a transfer of value which is made by an individual but is not
an exempt transfer’ (IHTA 1984, ss 1, 2).
General calculation
Step 1: Identify the transfer of value
Any disposition which reduces the value of the transferor’s estate. On death, tax is
charged as if the deceased had made a transfer of value of his estate.
Step 2: Find the value transferred
Lifetime transfer, this is the amount of the reduction in the transferor’s estate.
Death, it is the value of the estate.
Step 3: Apply any relevant exemptions and reliefs
Various exemptions and reliefs exist for public policy reasons.
Step 4: Calculate tax at the appropriate rate
zero per cent. - ‘nil rate band’ (currently £325,000).
Rate in excess of the nil rate band varies according to the type of transfer.
The nil rate band will not neccessarily be available in full (or at all) for any given transfer.
Cumulation – Any chargeable transfers made by transferor during that period must be
taken into account to determine how much of the nil rate band remains available.
TRANSFERS ON DEATH
Step 1: Identify the transfer of value
The value transferred is
The value of the deceased’s ‘estate’ immediately before his death.
Definition of ‘estate’
IHTA 1984, s 5(1) - all property to which he was beneficially entitled immediately
before his death, with the exception of ‘excluded property’.
(a) Property which passes under the deceased’s will or on intestacy.
The deceased was ‘beneficially entitled’ to all such property immediately
before he died.
(b) Property to which the deceased was ‘beneficially entitled’ immediately before his
death but which does not pass under his will or on intestacy.
Deceased’s interest in any joint property passing on his death by
survivorship to the surviving joint tenant(s). The deceased will be taken to
have owned an equal share in the property with the other joint tenant(s).
(c) Property included because of special statutory provisions.
(i) certain trust property; and
, (ii) property given away by the deceased in his lifetime but which is ‘subject
to a reservation’ at the time of death.
Trust property included in the estate for IHT purposes
If entitled to the income from a trust - ‘beneficially entitled’ to the capital which
produces that income - trust fund taxed as if it were part of the beneficiary’s estate.
‘qualifying interest in possession’.
must be an interest under which the beneficiary is entitled to claim the income from
the trust property (or enjoy trust property) with no power on the part of the
trustees to decide whether or not he should receive it.
On/after 22 March 2006, qualifying interest in possession in limited circumstances.
‘immediate post-death interest’ (IPDI) - an interest in possession arising on the
death of the settlor under his will or intestacy.
Property subject to a reservation
The Finance Act 1986 - give property away more than 7 years before death but
continuing to enjoy the benefit of the property.
Deceased gave away property during lifetime but did not transfer ‘possession and
enjoyment’ of the property/was not entirely excluded from enjoying the property.
If property reserved - ‘beneficially entitled’.
Property outside the estate for IHT purposes
life assurance policy once it is written in trust for a named beneficiary.
discretionary lump sum payment made from pension fund to the deceased’s family.
Excluded property
Certain property which would otherwise be included in the estate for IHT purposes
Excluded property is not part of the estate for IHT purposes.
‘reversionary interest’- a future interest under a settlement (an interest in
remainder under a trust).
EXAMPLE - In 2000, Faith created a settlement placing £500,000 on trust for Guy for
life, remainder to Hazel absolutely. Whilst both Guy and Hazel are alive, Guy has a
qualifying interest in possession and Hazel has a reversionary interest (that is
excluded property).
Step 2: Find the value transferred
Basic valuation principle
‘the price which the property might reasonably be expected to fetch if sold in the
open market’ immediately before the death (IHTA 1984, s 160).
The value of an asset agreed for IHT purposes is known as the ‘probate value’.
Modification of the basic valuation principle: s 171
IHTA 1984, s 171 - where the death causes the value of an asset in the estate to
increase or decrease, that change in value should be taken into account.
Valuing quoted shares
The value of quoted shares is taken from the Stock Exchange Daily Official List for
the date of death (or the nearest trading day).
The list quotes two prices. To value the shares for IHT, take one-quarter of the
difference between the lower and higher price and add it to the lower price.
Debts and expenses
