Paper 5 Inheritance Tax, Trusts and Estates

Transcription

1 Paper 5 Inheritance Tax, Trusts and Estates Part 1 Question 1: Exempt 1) National Saving and Investment certificates 2) Car 3) Premium bonds 4) Race horse (wasting chattels) 5) Chattel with proceeds less than 6,000 and purchased less than 6,000 6) Cash Question 2: Cash 300,000 Shares 300,000 BPR 300,000 Cash 300,000 Annual exemption 08/09 & 07/08 (6,000) 294, , ,000 Nil Rate Band 325, ,000 x 20/80 Gross up cash 294, ,250 67,250 = 361, ,000 = 661,250 67,250 x ,250 = 10.17% 30 months from 01/01/09 until 20/12/13 30% x 15/40 x % = % Distributions 150, , , ,000 x % = 3,432 payable

2 Question 3: The 10,000 gift made to her child is a PET. Annual exceptions 10,000 (3,000) (3,000) 4,000 The gift to Annabel is a small gift, so exempt for IHT. Of the gift to Rachel, only the first 250 is exempt. The remainder of 150 is a PET and will become chargeable if Maisy dies within seven years. Question 4: Trust fund: 850,000 NIL RATE BAND REMAINING 325,000 (125,000) 200,000 Trust fund 850,000 NRB (200,000) 650,000 x 20% = 130,000 39,015 payable by trustees. 130,000 x 100 = , % x 30% = 4.59% 850,000 x 4.59% = 39,015 Question 5: Interest Int 11,000 Dividends Dividends 9000 x 100/90 10,000 11,000 10,000 1,000 x 20% ,000 x 45% 4,500 10,000 x 37.5% 3,750 8,450 Tax credit (1,000) 7,450

3 Tax pool b/f 350 4,700 3,750 10% 3,750 2,750 7,800 Distribution 10,000 x 45/55 (8,182) 382 payable Question 6: Where a trust is a settle interested trust, the income received is taxed on the settler. No trustee expenses are deductible. However, allowable expenses that are normally allowable if the settler (e.g. personally allowances) are deductible. Income comes with a non-refundable tax credit of 45%. Question 7: 1) Pre-22 March 2006 there is no inheritance tax when capital is paid, as it is treated as his own. The trust would be a qualifying interest in possession trust. 2) Post-22 March 2006 it is a relevant property trust and there is an inheritance charge when the capital is paid (exit). Question 8: Interest in possession trusts are not allowed to deduct trustee expenses. They are only allowed to deduct specific expenses, e.g. rental. Discretionary trusts are allowed to deduct expenses. Question 9: 1) Proceeds: 50,000 x 28% = 140,000 Holdover relief. 2) Paper tax returns must be done by 31 October 2014 (or 3 months after date of notice). Payment date is 31 January 2015.

4 Question 10: Estate 800,000 Because John left all his assets to a registered charity which is exempt for inheritance tax, John can transfer his unused nil rate band to Mabel, 100% x 325,000. Estate 800,000 Less: Mabel and John NRB 650, , ,000 x 40% = 60,000 payable Question 11: Flat 30,000 gain 1 st year Garage 500 gain 1 st year House (55,000) loss 3 rd year Holiday home (5,000) loss 4 th year The overall loss is 29,500. You net all the loss made within four years since death and gain made within three years of death. The loss would have been restricted if her executors had made a purchase within four months of the last sale during the three year period since death. Question 12: 1) You must submit a tax return IHT100 within twelve months of the end of the month in which the CLT became chargeable. Due payment date is 30 April if the CLT happened within the first half of the year; April September or six months after that (if the CLT happened after 30 September). 2) Not considered to be a reasonable excuse: a. Lack of fund b. Did not have time c. Did not know the correct figures should submit estimates and amend once known. 3) Considered to be a reasonable excuse: a. Online system went down b. Bereavement in the family

5 Part 2 Question 1: 1. 01/02/2005 PET gift 9,000 Annual exemptions ( 3,000) Previous years 3,000 30/04/2008 Spouse exemption 28/04/2008 Chargeable life time transfer (CLT) 325,000 Annual exemption 3,000 Previous 3, , NRB 312,000 7,000 x 20% = 1,400 payable 06/11/2008 PET gift 20,000 Wedding gift exemption ( 5,000) 15,000 25/09/2009 CLT gift 100,000 Annual exemption ( 3,000) 97,000 NRB ( 13,000) 84,000 x 20% = 16,800 NRB workings: NRB remaining 325,000 NRB ( 312,000) 13,000 1,400 16,800 18,200

6 2. 01/02/2005 PET not chargeable after died after seven years of gift 30/04/2008 Spouse exemption 28/04/2008 Chargeable as died within seven years 325,000 ( 3,000) ( 3,000) 319,000 Covered by NRB ( 319,000) No additional tax to pay. 06/11/2008 PET becomes chargeable as within seven years of death. 20,000 ( 5,000) NRB remaining 325,000 15, ,000 ( 6,000) 9,000 x 40% = 3,600 Less taxpayer relief (3,600 x 40%) ( 1,440) 4-5 years 2,160 25/09/2009 CLT additional tax 100,000 ( 3,000) 97,000 No NBR remaining - 97,000 x 40% = 38,800 Less tax paid 16,800 Less taper relief ( 7,760) 3-4 years 38,800 x 20% = 14, Art 50, not deductible as paid personally and not out of estate. Bungalow 300,000 Mortgage (150,000) 150,000 14, ,160 = 16,400 Gambling debt is not deductible as not legal and should not be paid out of estate. Executor will be held liable by the beneficiaries. Funeral expenses are deductible. Art 50,000 Bungalow 150,000

7 Cash, bank, inv. 26,150 Shares 198,000 Less BPR (198,000) 226,150 Funeral exp. (3,000) No NRB left 223,150 x 40% = 89,260 payable 4. Chris daughter can redirect her inheritance to her own child by doing a deed of variation, so the transfer is deemed to have been made by Chris to her daughter s child, so no IHT. 5. So you know exactly what you have to do. So you know the rules and regulations. Question 2: 1. Trust for bereaved minors: - Must be set up on death by a parent in their will. - Must be set up in by a parent by intestacy. - The bereaved minor must become entitled to the capital trust fund by 18 years of age. 2. The inheritance tax is included in the deceased parent s death estate so there is no IHT on the bereaved minor. 3. There is no disposal for CGT on the trust when the bereaved minor becomes entitled to the capital. No CGT when trust is set up by will/intestacy. 4. Will 5. - Must be in writing. - Must be signed by the tester. - Must have two witnesses sign the will and be present when the tester signs the will. - Must be testacy disposition. - Collect the testacy disposition. - Collect the asset from the UK estate. - Deal with HMRC and pay any tax liabilities. - Distribute the assets according to the will.

8 Question 3: 1. N/S S D Rental 9, ,000 x 20% 200 8,900 x 45% 4,005 Tax payable 4,205 (W1) Rental income 1,000 x 12 12,000 Less council tax (1,000) Less wear and tear (1,100) 12,000 x 1,000 x 10% 9, Property 283,000 Legal fees (2,500) Agent fees (3,000) Proceeds 277,500 Cost: - Property 245,000 - Enhancement 20, ,000 Proceed 283,000 Cost (265,000) 18,000 Trustee annual exp (5,450) 12,550 x 28 = 3,514

9 shares Value lower of: 1) = 12/14 = = 843p 2) /2 = 845p The lower value is 843p. Value of share: 5,000 x 843p = 42, You should keep a trust account with separate name and capital records to assist with calculating the Inheritance Tax ten year charge, because you need to know the value of the trust and the date of the ten year anniversary. In addition, you need to know how much has been distributed out of the trust to work out how much nil rate band is remaining to work out the tax charge for the ten year charge. 5. Trustee may use statutory powers of advancement to distribute the asset if the beneficiary needs it for his career/future (e.g. to set up a business). Question 4: 1. Interest Dividends Interest Gross 500 Div x 100/90 25, ,000 Tax payable 500 x 20% x 10% 2,500 2,600 Less tax credit (2,500) Tax payable 100

10 Income account balance to carry forward: Interest Dividends Interest Gross ,000 Tax (100) (2,500) ,500 Expenses (500) ,000 Distribution (400) (9,600) Income to off nil 12, Personal representatives can only claim principal private residence relief if the beneficiary is entitled to at least 75% of the proceed, either outright or interest in possession. 3. To be deemed domicile, one must have been resident in the UK for 17 out of the previous 20 years. 36 months since ceased UK domicile. If you deemed domicile, all your overseas assets will be chargeable whereas they would normally be excluded property. If you are deemed domicile and remain outside the UK for four consecutive years, it ceases.