CALCULATING INHERITANCE TAX
Step 1: Calculate the cumulative total and find the remaining NRB.
Has the testator given any lifetime gifts? (e.g. a car worth £5,000 to his daughter in May 2009)
Are there any exemptions which apply to those gifts? (Annual exemption of £3,000 per year (can back-date unused exemptions by one year using a max of £6,000), spousal exemption, gifts in consideration of marriage, business property relief etc...) If so, reduce the gifts by the exemption rate, then add the cumulative total together. Take the cumulative total away from the nil-rate-band of £325,000 (NRB) and this figure is the new NRB figure to be deducted at Step 6.
Step 2: Work out what property falls inside or outside of the taxable estate.
Property falling outside the estate will be foreign property, life interest trusts in which the deceased was a remainderman but the life tenant is still alive, discretionary pension schemes, and insurance schemes written in trust.
Step 3: Calculate the taxable estate by adding together all property which does not fall outside the scope.
Step 4: Deduct debts (this may include funeral expenses, credit cards, etc)
Step 5: Deduct exemptions and reliefs (NB: these must only be those which apply on death e.g. spousal, charity, business property, agricultural property)
Step 6: Take away the remaining NRB from Step 1 and then tax at 40% to find the total IHT sum due.
CALCULATING EXIT CHARGES FOR IHT
Exit charges may be due where a distribution is made from a discretionary trust or a life interest trust.
Step 1: Ascertain the Hypothetical Chargeable Transfer (HCT) i.e. the amount of money in the trust
Step 2: Calculate the tax on the HCT by removing the NRB of £325,000 and then taxing at 20%
Step 3: Work out the Average Rate using the following calculation: Step 2/Step 1 x 100
Work out the Settlement Rate using the following calculation: Average Rate x 30%
Step 4: Ascertain how many 'quarters' (i.e. 3 months - there are 4 quarters in a year) have passed since creation of the trust; divide this number by 40. Then multiply the answer by the sum of money which is leaving the trust (e.g. if £100,000 is being given to the testator's son then £100,000 is the value leaving the trust) and multiply by the Settlement Rate percentage.
i.e. X/40 x 'amount leaving the trust' x SR%
The answer is the value of the exit charge.
Private Client/Wills and Probate: Variations and disclaimers of beneficiary entitlement
Where a beneficiary receives entitlement under will or intestacy but does not wish to keep that benefit for themselves, there are 2 main options.
Variation - used where the beneficiary wishes someone else to take the benefit
Disclaimer - used where the beneficiary refuses the gift entirely
The governing law is s.142 Inheritance Tax Act 1984 which applies to both variations and disclaimers.
Anyone over the age of 18 with sufficient mental capacity is able to vary/disclaim.
The conditions that must be met are:
- In writing
- Within 2 years of the death
- Not for money or any other form of consideration
- HMRC must be notified where additional tax is due
Variation may be over whole or part of the entitlement; disclaimer must be over the whole.
Variation may be before or after acceptance of the gift; disclaimer must be before acceptance.
Tax consequences of a variation or disclaimer: under usual rules, giving an interest away would be classed as a PET (Potentially Exempt Transfer - IHT is only payable if the person giving the gift dies within 7 years) for IHT, and would be a 'Deemed Disposal' for CGT. However, as long as s.142 IHTA and s.62(6) TCGA are adhered to, no tax will be payable.
Variation - used where the beneficiary wishes someone else to take the benefit
Disclaimer - used where the beneficiary refuses the gift entirely
The governing law is s.142 Inheritance Tax Act 1984 which applies to both variations and disclaimers.
Anyone over the age of 18 with sufficient mental capacity is able to vary/disclaim.
The conditions that must be met are:
- In writing
- Within 2 years of the death
- Not for money or any other form of consideration
- HMRC must be notified where additional tax is due
Variation may be over whole or part of the entitlement; disclaimer must be over the whole.
Variation may be before or after acceptance of the gift; disclaimer must be before acceptance.
Tax consequences of a variation or disclaimer: under usual rules, giving an interest away would be classed as a PET (Potentially Exempt Transfer - IHT is only payable if the person giving the gift dies within 7 years) for IHT, and would be a 'Deemed Disposal' for CGT. However, as long as s.142 IHTA and s.62(6) TCGA are adhered to, no tax will be payable.
Private Client/Wills and Probate: Tax options for dealing with post-death asset losses
Sometimes when a testator dies and an asset within his estate is sold, that asset will produce a loss. i.e. the asset will be worth less at the point of sale than it was at the testator's time of death.
In order to reduce the tax bill, there are circumstances in which the executors will be able to claim tax relief on such a loss. These circumstances are: (1) land that has sold and made a loss within 4 years of death, and (2) shares that have sold and made a loss within 1 year of death.
If one of the above situations applies, the executors will have two possible options:
OPTION 1: Claim 'IHT Loss Relief' - this has the effect of 'pretending' the asset was worth X at the date of the testator's death. X = the current, lower value of the asset. This means the executors can claim a refund from HMRC on the difference between the old value and the new value of the asset.
For example: the testator's shares in Tesco Plc were worth £6,000 at the date of his death but when they were sold 6 months later they were only worth £4,000. IHT Loss Relief would pretend that at his death they had been worth £4,000. This means that too much IHT was paid to HMRC at the time of death, and a refund of £2,000 is now required.
OPTION 2: Offset CGT losses against CGT gains made in the same tax year - this option can only be used where 'gains' have been made in the same tax year. The effect will be to reduce the entire CGT bill for that year.
For example: (continuing on from the above example) if the testator's house had been sold at a gain of £10,000 (it was worth £190,000 at death but sold for £200,000) but then a £2,000 loss was made on his shares in Tesco Plc, the executors would be able to off-set the loss of £2,000 against the gain of £10,000. The total CGT liability would be £8,000.
NB: it is NOT possible to use both IHT Loss Relief and also CGT relief. This is because if IHT Loss Relief is claimed, we are pretending that the death value was the same as the sale value, and therefore there has not been any loss in which we could off-set CGT!
In order to reduce the tax bill, there are circumstances in which the executors will be able to claim tax relief on such a loss. These circumstances are: (1) land that has sold and made a loss within 4 years of death, and (2) shares that have sold and made a loss within 1 year of death.
If one of the above situations applies, the executors will have two possible options:
OPTION 1: Claim 'IHT Loss Relief' - this has the effect of 'pretending' the asset was worth X at the date of the testator's death. X = the current, lower value of the asset. This means the executors can claim a refund from HMRC on the difference between the old value and the new value of the asset.
For example: the testator's shares in Tesco Plc were worth £6,000 at the date of his death but when they were sold 6 months later they were only worth £4,000. IHT Loss Relief would pretend that at his death they had been worth £4,000. This means that too much IHT was paid to HMRC at the time of death, and a refund of £2,000 is now required.
OPTION 2: Offset CGT losses against CGT gains made in the same tax year - this option can only be used where 'gains' have been made in the same tax year. The effect will be to reduce the entire CGT bill for that year.
For example: (continuing on from the above example) if the testator's house had been sold at a gain of £10,000 (it was worth £190,000 at death but sold for £200,000) but then a £2,000 loss was made on his shares in Tesco Plc, the executors would be able to off-set the loss of £2,000 against the gain of £10,000. The total CGT liability would be £8,000.
NB: it is NOT possible to use both IHT Loss Relief and also CGT relief. This is because if IHT Loss Relief is claimed, we are pretending that the death value was the same as the sale value, and therefore there has not been any loss in which we could off-set CGT!
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