IHT case study 2016/17
Marion Gibson is aged 69 and widowed. Her husband died last year, leaving his entire estate of £400,000 to their son Peter.
She retired from her job as a senior manager of a marketing consultancy firm four years ago. Her father died in 2004 leaving her a large sum of money.
As a result of the legacy, Marion has made the following gifts. Any lifetime inheritance tax liability has been paid by the recipients of the gifts:
£95,000 to her niece, Jane in June 2006
£85,000 to her son Peter in July 2009
£390,000 into a discretionary trust for her grandchildren Zoe and Freya in February 2011. The IHT nil rate band at the time the trust was created was £325,000.
A gift of £100,000 to Peter in November 2012.
Marion has not made any gifts other than those listed and still has assets of £680,000 after making the gifts.
She has come to see you to discuss any potential inheritance tax that may be payable on these gifts and her residual estate.
Her sister, Kathryn also received a large inheritance on the death of their father. She has been very successful running her own business over the last few years and has built up substantial wealth as a result. She is aged 65 and divorced with one son, Richard. She also wishes to start planning to reduce the effects of inheritance tax but wishes to retain a fair amount of her wealth whist she is alive, so that she can start scaling down her business activities and enjoy herself a bit more.
She decided to give £406,000 to Richard on 1 September 2015. Her remaining assets are worth £1,400,000 and her main aim is to put some life assurance in place to cover her potential inheritance tax liability. Kathryn has not made any other gifts in the last seven years.
Questions:
1. Which of the gifts made by Marion would neither have resulted in an immediate liability to inheritance tax at the time it was made, nor become chargeable on her death assuming she dies on 31 May 2016?
Answer: The gift to Jane in June 2006.
2. How many of the gifts made by Marion would become chargeable on her death assuming that she dies on the 31 May 2016?
Answer: Three
3. Which of the following IHT exemptions could be applied to the gifts made by Marion in order to reduce the potential inheritance tax payable on them as much as possible?
a) Annual exemption
b) Small gifts exemption
c) Normal expenditure out of income.
Answer: Annual exemption
4. In respect of the gift of £390,000 made by Marion to the discretionary trust, what was the net value of the transfer chargeable to inheritance tax at the time it was made?
Answer: £390,000 – £3,000 annual exemption – £325,000 = £62,000
5. In respect of the gift of £390,000 made by Marion to the discretionary trust, what was the inheritance tax liability at the time it was made?
Answer: £62,000 x 20% = £12,400
6. As the gift to the discretionary trust in February 2011 resulted in an inheritance tax liability, what further tax liability became payable (if any) on the gift to Peter at the time it was made in November 2012?
Answer: Nil. No lifetime IHT on PETs.
7. Calculate the inheritance tax liability arising on Marion’s death in respect of the gift made to the discretionary trust assuming that she dies on the 31 May 2016.
Answer: £95,000 gift to Jane drops out of the cumulation of the estate. Gift in July 2008 becomes chargeable. £85,000 – £6,000 (annual exemptions for 2009/10 and 2008/9) = £79,000. Gift to discretionary trust: £390,000 – £3,000 (annual exemption for 2010/11) = £387,000. Deduct reduced nil rate band (£325,000 – £79,000) = £246,000 produces net transfer chargeable to inheritance tax of £141,000. £141,000 x 40% = £56,400 tax. Chargeable transfer within 5-6 years of death. Therefore % of full death rate chargeable = 40%. £56,400 x 40% = £22,560. Deduct inheritance tax paid during lifetime of £12,400 Inheritance tax due = £10,160.
8. Who would be responsible for payment of any inheritance tax liability arising in respect of the gift to the discretionary trust assuming that Marion dies on the 31 May 2016?
Answer: The trustees of the discretionary trust.
9. Calculate the inheritance tax liability arising on Marion’s death in respect of the gift made to Peter in November 2012 assuming that she dies on the 31 May 2016?
Answer: £100,000 – £6,000 (annual exemptions for 2012/13 and 2011/12) = £94,000 x 40% = £37,600. Chargeable transfer within 3-4 years of death. Therefore % of full death rate chargeable = 80%. £37,600 x 80% = £30,080.
10. Calculate the inheritance tax payable on the residual estate of Marion assuming that she dies on 31 May 2016.
Answer: £680,000 x 40% = £272,000
11. What type of policy would you recommend to provide further funds in respect of the potential inheritance tax charge arising directly on the gift by Kathryn to her son, Richard?
Answer: Gift inter vivos decreasing term assurance.
12. In respect of your answer to the previous question, what would be the recommended initial sum assured?
Answer: [£406,000 – £6,000 (2 x Annual exemption allowances) – £325,000] x 40% = £30,000
13. You recommend that Kathryn effects a level term assurance for seven years to cover the additional inheritance tax that may fall due on her estate as a result of the lifetime gift to her son Richard. What level of sum assured would you recommend?
Answer: £325,000 x 40% = £130,000
14. What other policy from the following options, would you recommend that Kathryn takes out in order to cover the inheritance tax due on the remainder of her estate?
Unit linked whole of life
Unit linked endowment
Level trerm assurance
Decreasing term assurance
Answer: Unit linked whole of life (in trust to the beneficiaries of her estate)
15. In respect of your answer to question 14, what would be the recommended initial sum assured?
Answer: (£1,400,000 – £325,000) x 40% = £430,000