One area that is due to come up in the Advanced Tax exam is a death estate.
Typically, inheritance tax questions tend to be either lifetime gifts where you need to deal with the IHT and CGT implications and the death estate.
You need to put all assets into the death estate and deduct any agricultural property relief on farms (100%) and business property relief (100%) on unquoted shares.
It is important to bear in mind that assets that are exempt for capital gains tax such as cars, cash and wasting chattels are all taxable for inheritance tax.
With the main residence, any repayment or interest only mortgage can be deducted but no relief is available for an endowment mortgage.
UK domiciled clients are subject to tax on their worldwide assets. If an overseas property is then sold, a maximum of 5% admin expenses can be deducted.
You cannot deduct the overseas tax from the UK estate and tax relief is given instead via double tax relief.
You then deduct any expenses such as bank loans and funeral expenses. In addition, there are 3 exempt legacies which escape tax : -spouse, charities, and political parties.
If the main residence is left to a direct descendant deduct the residence nil rate band of £175,000 before the normal nil rate band.
Usually, part of the nil rate band of £325,000 is consumed by lifetime transfers so not 100% is available on the death estate.
If 10% of the baseline amount (add back any RNRB and charitable legacy) is left to a charity, then tax the death estate at a reduced rate of 36% instead of 40%.
Once you have computed the tax, deduct quick succession relief if any assets were taxed twice in the last 5 years based on the formula (original tax x original asset/ original death estate x QSR%). Just remember 2 deaths in 1 year is 100% and then reduce by 20% for each successive year.
Finally, if any overseas assets have suffered tax, deduct double tax relief based on the lower of UK tax and overseas tax (given). The examiners will examine a fictional country and you will be given the overseas tax in the question.
Unilateral double tax relief is always available even in the absence of a double tax treaty.
This tax is payable by the executors or personal representatives 6 months after the month of death. Remember that for instalment property (buildings and businesses that do not get BPR) tax can be paid in 10 annual instalments.
If you are planning on doing Taxation or Advanced Tax in March 2024, I recommend you purchase Tax Condensed or Advanced Tax Condensed which will allow you to learn the technical rules. If you then practice the key questions I recommend, you too will be ready for anything the examiner throws at you.
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