Inheritance tax (IHT) is clearly one of the most pressing concerns among advisers.
It is little wonder – HM Revenue & Customs’ IHT receipts stand at approximately £5.2bn for 2017 to 2018, and are expected to continue rising.
Here is a list of the most common queries, including crucial information on exemptions, periodic charges, and the 14-year shadow.
1. Transferable nil rate bands – If, on first death, everything is left to the surviving spouse/civil partner, does the survivor now have a lifetime gift threshold of £650,000?
Unfortunately the answer is no, as any available transferable nil rate band (TNRB) can only be used against the IHT arising on the death of the surviving spouse - it cannot be used by the surviving spouse/civil partner for lifetime gifting.
There is also a lot of confusion around transferring the residence nil rate band (RNRB), which was introduced in April 2017.
The RNRB is transferable between spouses/civil partners on death, much like the standard nil rate band (NRB). It is the unused percentage of the RNRB from the estate of the first to die which can be claimed on the second death.
If the first death occurred before April 2017, on the survivor’s death there will be a 100 per cent RNRB available, irrespective of whether the first death owned residential property. However, if the first death’s estate was greater than £2m, then the RNRB would be tapered.
Remember that nil rate bands transfer as percentages not amounts, ensuring that the NRB at the time of the second death is increased by the proportion of the NRB unused on the first death.
For example, Janet died in 2008 to 2009 when the NRB was £312,000. She left £156,000 to her children and everything else to her husband John, who subsequently died in 2018, when the NRB was £325,000. As 50 per cent of Janet’s NRB was unused, John’s personal representatives can increase his NRB by 50 per cent to £487,500. John’s personal representatives would also be able to claim 100 per cent of Janet’s RNRB as her estate was less than £2m.
2. Periodic charges - what should be included at the 10th anniversary and what nil rate band needs to be used?
The answer depends on the type of trust.
Calculating the value of a trust is relatively straightforward if you are dealing with a discretionary gift trust. However, it is a little more complicated for gift and loan trusts and discounted gift trusts.
- Under a gift and loan trust, any outstanding loan due back to the settlor needs to be deducted from the value of the trust as the trustees have an outstanding liability that needs to be taken into account when calculating the net value of the trust.
- For a discounted gift trust, if the settlor is still alive, the trustees have an obligation to provide the regular payments to them and the actuarial value of this commitment should be deducted from the value of the trust.
When looking at what distributions need to be factored into the periodic charge calculation, these refer to the distributions to beneficiaries.
If the trust allows reversions back to the settlor and these are correctly carved out in the trust at outset, they will not be treated as distributions (for example, discounted gift trusts and flexible reversionary trusts).
Questions appear on the last page of this article.