Inheritance Tax

2
BAA Tax: Lecture 18
Spring 2015
Finance Act 2014

Robert Berry
bob@bobberry.co.uk
Inheritance Tax

Introduction
In the last lecture we looked at
the charge to IHT and applied
this to lifetime transfers into
relevant property trusts, and
also the death rate charge on
lifetime transfers within 7 years
of death.

Inheritance Tax

IHT payable on
death

This comprises:
additional tax on chargeable lifetime
transfers made by the deceased during
the 7 years ending on the date of his death
tax on any PETs made by the deceased
during the 7 years ending on the date of
his death
tax on the estate at death (unless
transfers are exempt)
Inheritance Tax

Chargeable Lifetime
transfers and PETs

When calculating IHT on chargeable lifetime transfers, PETs are

initially ignored. If the donor then dies within 7 years, PETs that
become chargeable will have to be taken into account when
calculating the extra IHT due on the chargeable transfers because
of the death. This may mean that a chargeable lifetime transfer
may lose all or some of the nil rate band. However once a
chargeable lifetime transfer has been grossed up it is not altered.
Transfers are taken in chronological order

PETs are completely ignored once the donor has lived for 7 years
but for chargeable lifetime transfers it is necessary to take into
account all other chargeable lifetime transfers made within the
previous 7 years to calculate the IHT liability. After 7 years a
chargeable lifetime transfer drops out of the cumulative total i.e.
there is a 7 year cumulation period. The tax rates used are those
applicable to transfers on death not those used for chargeable
lifetime transfers.
Inheritance Tax

Taper relief
The tax calculated above will then be reduced
by taper relief depending on the number of
years between the date of the transfer and the
date of death. Taper relief is given as follows:

Period between transfer and death

reduction in tax

3 years or less
Over 3 but no more
Over 4 but no more
Over 5 but no more
Over 6 but no more

0
than
than
than
than

4
5
6
7

years
years
years
years

Inheritance Tax

20
40
60
80

Final steps in calculation

On each transfer, any tax paid during the
lifetime of the transferor is subtracted
leaving a balance of tax due on the
transfer.
This tax is the responsibility of the
transferee.
If the lifetime tax paid exceeds the liability
on death, there is no further tax due but
neither will any repayment be given.
Inheritance Tax

Tax on the deceased

persons estate
IHT on the deceaseds estate (unless
exempt) is calculated using the rates of tax
applicable on death.
The 0% band is reduced by any gross
chargeable transfers made in the 7 years
ending on the date of death including any
PETs made in the period.
Any remaining 0% band is then set against
the value of the estate and tax at 40% is
calculated on the balance.
Inheritance Tax

Example 1 IHT on death

T dies on 2/3/15 leaving an estate of
400,000.
Calculate the IHT on the estate on three
scenarios.
Assume that gross chargeable transfers made
by T in the 7 years preceding his death were:
nil
125,000
370,000
Inheritance Tax

Example 1 - Answer

a)

325,000 x
75,000 x
400,000

0%
40%

0
30,000
30,000

IHT paid by PRs of the estate in all 3 cases

b)

No lifetime transfers

c)

125,000 gross chargeable transfers

200,000 x
0%
(325,000 - 125,000)

200,000 x
400,000

80,000
80,000

40%

370,000 gross chargeable transfers

400,000 x
40%
(nil band fully used)
Inheritance Tax

160,000

Example 2
L gave 339,000 (her first transfer for IHT)
to her son on 1/2/2011. On 10/10/2014 she
gave 369,000 to a trust, the trustees paying
the lifetime tax due. On 11/01/2015 L died.

Calculate:
1.The lifetime tax payable by the trustees
on the lifetime transfer made in 2014.
2.The death tax payable on the lifetime
transfer made in 2011.
3.The death tax payable on the lifetime
transfer made in 2014.
Inheritance Tax

Example 2 Answer (part

1)

Value

before

2010/11
2014/15

AE for
AE

Gift to

AE for Value
CY
PY

son PET 339,000

Gift to trust CLT 369,000

Tax due during lifetime

Net
Gross
2014/15
Gift to trust - nil
325,000
0
Balance (not grossed up - Trustees paid tax)

363,000
363,000

Inheritance Tax

after AE
-3,000 -3,000 333,000
-3,000 -3,000 363,000
Tax
CLT

325,000

38,000 38,000 7600

7600

Example 2 Answer (part

2)
Tax on death - 7 year review back from 11/01/2015
11/01/2008

The PET on 1/02/2011 is within the 7 years (between 3 to 4 years

from death) and is taxed
at death rate (40%) - the nil band is used against this (now)
chargeable transfer:
325,000
x
0%
0
8,000
x
40%
3200
333,000
Less: Taper Relief (3 to 4 years) 20%
2560
Less: Lifetime tax paid
0
IHT due from son
2560

Inheritance Tax

-640

Example 2 Answer (part

3)
The CLT of 10/10/2014 is within the 7 years
(between 0 to 1 years from death) and is retaxed at death rates No nil rate remains as the transfer to the son
(above) used it all up:
363,000 x
40% 145200
Less: Taper Relief (0 to 1 years) 0%

145200
Less: Lifetime tax paid (above)
-7600
Additional tax due from the Trustees
137600

Inheritance Tax

Transfer of unused part of

nil rate band
This arises when a spouse or civil partner dies
and not all of the nil rate band is used up on
his/her death.
The unused part of the nil rate band can be
transferred to the surviving spouse / civil partner
to be used on his/ her death.

The amount that can be transferred is the
proportion of the nil rate band which was unused
on the death of the first spouse/ civil partner.
This proportion is then applied to the amount of
the nil rate band which is in force on the date of
the survivors death.
Inheritance Tax

Nil rate band

Tax Year
6/4/03 5/4/04
6/4/04 5/4/05
6/4/05 5/4/06
6/4/06 5/4/07
6/4/07 5/4/08
6/4/08 5/4/09
6/4/09 5/4/10
6/4/10 5/4/11
6/4/11 5/4/12
6/4/12 5/4/13
6/4/13 5/4/14
6/4/14 5/4/15

Nil band
0 - 255,000
0 - 263,000
0 - 275,000
0 - 285,000
0 - 300,000
0 - 312,000
0 - 325,000
0 - 325,000
0 - 325,000
0 - 325,000
0 - 325,000
0 - 325,000

Inheritance Tax

LR
20%
20%
20%
20%
20%
20%
20%
20%
20%
20%
20%
20%

DR
40%
40%
40%
40%
40%
40%
40%
40%
40%
40%
40%
40%

DR*

36%
36%
36%

Example 3 Transfer of
unused nil rate band
W died on 21/10/14. Her husband had died
previously and his estate on death (including
transfers made within 7 years of death) had
absorbed 100,000 of the nil rate band at the
time.

Calculate the nil rate band available on Ws
death assuming her husband had died in:

May 2007
July 2009
Inheritance Tax

Example 3 - Answer
Nil rate band for 2007/08 was 300,000
H had used 100,000 leaving 66.6666% available to W
(200,000/300,000)
W has 325,000 + (325,000 x 0.6666666) = 541,666
available.

2
Nil rate band for 2009/10 was 325,000
H had used 100,000 leaving 69.230769 % available to
W (225,000/325,000)
W has 325,000 + (325,000 x 0.69230769) = 550,000
available.
1

Inheritance Tax

Due date for payment of

IHT

1. for chargeable lifetime transfers, due date is the

later of: - 6 months from the end of the month in which the
transfer is made
- 30 April following the end of the tax year in which the
transfer is made

2. For IHT on PETs becoming chargeable and additional

IHT on chargeable lifetime transfers (because of donors
death); the due date is 6 months from the end of the
month in which death occurred.

3. For IHT on an estate at death, due date is the earlier of

- 6 months from the end of the month in which death
occurred
And
- When the PRs deliver their account
Inheritance Tax

Example 10
State the due dates in respect of
chargeable lifetime transfers made on
the following dates:
a) 25/3/14
30-Sep-14
b) 20/7/14
30-Apr-15
c) 30/10/14
30-Apr-15
Inheritance Tax

VALUATIONS FOR IHT

QUOTED SHARES AND
SECURITIES

Valuation of assets for IHT

The value of any property is the price which the asset
might be expected to fetch if sold on the open market.


Quoted shares and securities

These are valued (as for CGT) taking the lower of:

lower quoted price + of (higher quoted price lower
quoted price)
the average of the highest and lowest marked
bargains (ignoring bargains marked at special prices)
Inheritance Tax

Valuation of Unit Trusts

Unit trusts

Unit trusts are valued at the managers bid price (lower of

the two published prices).

Inheritance Tax

Valuation of Life
Assurance Policies
Where a persons estate includes a life assurance
policy which matures on his death the proceeds
payable to his PRs must be included in his estate
for IHT.

Where a persons estate includes a life policy which
matures on the death of someone else, the open
market value must be included in his estate.

If the individual writes a policy in trust or assigns a
policy, the proceeds will not be paid to his estate
and are therefore not included as part of his free
estate at death.
Inheritance Tax

Valuation of Overseas
Property
Overseas property

Property situated outside the UK is valued
in the currency of the propertys location,
converted to sterling at the date of transfer
(using the lowest sterling daily rate).

Inheritance Tax

Valuation on Death Expenses

Debts and funeral expenses
Only bona fide debts and for full
consideration may be deducted. Gambling
debts would, therefore, not be deductible.
A debt charged on a specific property is
deductible from that property.
Debts contracted abroad must be deducted
first from foreign property but any excess can
be deducted from UK property if the debts
would be recoverable in the UK.
Reasonable funeral expenses may be
deducted including a tombstone.
Inheritance Tax

Example 5 Estate on
death
Z died on 19/6/14. His estate comprised:
10,000 shares in A plc. quoted at 84-89 with
bargains marked at 85p, 87p and 90p
8,000 shares in B Ltd with a market value of
9,280.
Freehold property valued at 150,000 subject
to a mortgage of 45,040.
Liabilities and funeral expenses were 2,700
(250 consisted of gambling debts).
Z had made a chargeable lifetime transfer of
340,000 in July 2009.
Calculate the IHT on the estate at death.
Inheritance Tax

Example 5 Answer
Estate on death 1

Estate at death

Aplc shares - lower of:

10,000 x 85.25p ( up)

8,5258,525
10,000 x 85p + 90p (average basis)
2

8,750

__________

Bplc shares

Market value
9,280

17,805

c/f

Inheritance Tax

Example 5 Answer
Estate on death 1

b/f
Freehold property

Value
(Mortgage)

150,000
(45,040)
104,960
_______________
122,765
Liabilities and funeral expenses
(2,450)
(Gambling debt of 250 not deductible)
__________

17,805

120,315
==========
Nil rate band used up by CLT within 7 years
Inheritance tax due 120,315

x 40% 48,126

Inheritance Tax

Comprehensive Melville
Q31.7
31.7 Tony died on 11 July 2014, leaving an estate valued at
500,000. None of the transfers made on his death were exempt
from IHT, He had made the following transfers during his lifetime:

3 May 2006 Gift to RP Trust (tax paid by trustees) 100,000

1 July 2007
Gift to daughter
250,000
1 August 2007 Gift to son
250,000
10 June 2009 Gift to RP Trust (tax paid by Tony)
450,000

Calculate the tax payable as a result of Tonys death

(Assume there is no unused nil-rate band to be
transferred from a previously deceased spouse or civil
partner).

Inheritance Tax

Melville Q31.7 Answer 1

Tony died on 11 July 2014 means that lifetime transfers
going back 7 years to 11 July 2007 need to be
reviewed.
The transfers were:
3 May 2006 Gift to RP Trust (tax paid by trustees)
100,000 OUT
1 July 2007
Gift to daughter
250,000 OUT/GONE!
1 August 2007 Gift to son
250,000
10 June 2009 Gift to RP Trust (tax paid by Tony)
450,000
Inheritance Tax

Melville Q31.7 Answer 2

The transfers were:

3 May 2006 Gift to RP Trust (tax paid by trustees) 100,000 CLT

1 August 2007 Gift to son
250,000
Recalculate
10 June 2009 Gift to RP Trust (tax paid by Tony)
450,000
Recalculate

To calculate tax to be paid as a result of Tonys death we need to

calculate what tax was paid on these gifts during Tonys lifetime.
The gift on 1 August 2007 had been a PET but is not reduced by
Annual Exemptions for 2007/08 or 2006/07 as these are used by
other gifts.
The gift on 1 June 2009 was a CLT and is reduced by Annual
Exemptions for 2009/10 and 2008/09 (3K each). Net value of
transfer is 444,000.
Inheritance Tax

Melville Q31.7 Answer

3
Values after Annual Exemptions

2006-07
94,000
2007-08
247,000

250,000
2009-10
444,000

Value
before
AE

AE for
current
year

Trust

100,000

3,000

Gift (D)

250,000

3,000

Gift (S)
Trust

250,000
450,000

Inheritance Tax

3,000

AE for
Value
previous after
year
AE

3,000

3,000

Melville Q31.7 Answer 4

Step One - IHT paid during lifetime
IHT paid on gift to trust on 10 June 2009 for 2009/10
would have been:
444,000 less available nil rate band in 2009/10
Nil rate band part used by CLT in 2006/07 (within 7
years of 2009/10). How much used? 100,000 AE
for 2006/07 and 2005/06 = 94,000.
Nil rate band for 2009/10 was 325,000 less 94,000
= 231,000.
Tax due on 213,000 (444,000 - 231,000) x 25% as
Tony paid tax = 53,250.
Gross value of transfer 497,250 (444,000 +
53,250)
Inheritance Tax

Melville Q31.7 Answer

5
Step Two - IHT due on transfers within 7 years of death
1 August 2007 Gift to son
250,000
Less available nil rate band
(325,000 less CLT in previous 7 years - 94,000) 231,000
Chargeable at 40%
19,000
19,000 x 40%
7,600
Less: taper relief (6-7 years from death) 80%
-6,080
IHT payable by son on or before 31 January 2015
Inheritance Tax

1,520

Melville Q31.7 Answer

6

Step Two - IHT due on transfers within 7 years of death

10 June 2009 Gift to RP Trust (tax paid by Tony)
497,250
Less available nil rate band
(325,000 all used)
0
Chargeable at 40%
497,250
497,250 x 40%
198,900
Less: taper relief (5-6 years from death) 60%
119,340

79,560
Less: Lifetime IHT paid (see previously)
IHT payable by trustees on or before 31 Jan 2015

Inheritance Tax

-53,250
26,310

Melville Q31.7 Answer

7
Step Three IHT on Estate at death
Tony died on 11 July 2014, leaving an estate
valued at 500,000. None of the transfers made on
his death were exempt from IHT.
Nil rate band used IHT is 40% x 500,000 =
200,000
Payable by PRs on application for probate or by 31
January 2015 whichever is the sooner.
What transfers on death could be exempt?
Transfers to Spouse, Charities, Political Parties, etc
Inheritance Tax

Next time..

Important IHT reliefs exist for

Business Property, Agricultural
property and Quick Succession.
We will look at these reliefs in IHT
lecture 3.
We will also look at the antiavoidance measure on gifts with
reservation.
Inheritance Tax

Reading and exercises

Reading and Exercises

Reading: Melville Chapter 31 (pages
502 504, 506 and 509)

Attempt exercises from Melville
questions 31.5 & 31.6.
Inheritance Tax

Seminar Question 1 (1)

Melanie made the following lifetime transfers:

8 July 2003
Gift of house to her daughter - 200,000
13 June 2009
Unquoted shares gifted to her son. The gift
consisted of 6,000 shares which were valued at
50,000. Before the gift Melanie owned 9,000
shares valued at 160,000 and after the gift the
remaining 3,000 shares were valued at 22,500.
Assume that Business Property Relief is not
available on these shares.
Inheritance Tax

Seminar Question 1 (2)

Melanie died on 23 October 2014 and her assets and
debts at death were as follows:

Assets

Shares in Tesco plc

320,000
Life assurance policy
See note
House in UK
175,000
Villa in France
80,000
Household furniture and jewelry
20,000
Car
5,000
Cash in bank
14,750
Debts
Mortgage secured on house - 10,000, Credit card bills - 7,000, Income
tax - 2,500,
Gas bill - 250.
Note: the value of the insurance policy immediately before Melanies
death was 60,000. The proceeds payable as a result of her death were
250,000.

Inheritance Tax

Seminar Question 1 (3)

The personal representatives of Melanies estate paid funeral
expenses of 2,500.
Melanie was widowed in August 2010. Her husband left 20,000
to his sister and the rest of his estate to Melanie. He had not
made any lifetime gifts. Melanie remarried in April 2013.
In her will she left her house in the UK to her second husband
and the remainder of the estate to her children.

Required:
Explain the inheritance implications of the lifetime gifts made
by Melanie.
Compute Melanies estate at death and the IHT due on it. State
who is liable to pay the tax due and the due date for payment.

Inheritance Tax

Seminar Answer 1 (1)

Lifetime transfers:
8 July 2003
PET - Gift of house to her daughter - became exempt on 8
July 2010 (after 7 years).
13 June 2009
PET - Unquoted shares gifted to her son. Melanie dies
before 7 years passes. The value of the shares on the
diminution basis is:
Valued before the gift 9,000 shares valued at 160,000
Value after the gift 3,000 shares were valued at 22,500.
Fall in value 137,500 AE 3,000 AE 3,000 = 131,500
On Melanies death 131,500 is covered by nil rate band of
325,000+
Inheritance Tax

Seminar Answer 1 (2)

Assets
Shares in Tesco plc
Life assurance policy
House in UK (less mortgage 10,000)
Villa in France
Household furniture and jewelry
Car
Cash in bank
Debts:

- 7,000+2,500+250

Less: Funeral expenses (reasonable)

Carried Forward

Inheritance Tax

320,000
250,000
165,000
80,000
20,000
5,000
14,750
854,750
(9,750)
845,000
(2,500)
842,500

Seminar Answer 1 (3)

Bought Forward

842,500

Less: Exempt transfer (to wife) house

(165,000)
677,500
Nil rate IHT band (includes unused % of first husband)
325,000 + (325,000 x 305,000/325,000)
= 630,000 less used by lifetime transfer (see earlier)
- 131,500 = 498,500
(498,500)
Taxable estate
179,000
179,000 x 40%
=
71,600
Payable by Personal Representatives on or before 30 April 2015
Who suffers tax?
Melanies children as it comes out of their inheritance.

Inheritance Tax