The Certainties of Life: Death, Taxes and IHT Questions on your CII AF1 or R03 Exam
Last updated on September 25th, 2019 at 4:20 am
There are only two certainties in life according to Benjamin Franklin. To those, we can add the certainty that questions on Inheritance Tax (IHT) will come up if you are sitting the R03 exam and of course the AF1 exam. Learn more about it so you don’t get caught out on exam day.
THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2017/18.
IHT is the place where death and taxes collide; although according to HMRC statistics, only around 3.9% of all deaths in 2014-15 led to an IHT charge (these are the latest figures). This is largely because the estate value was less than the Nil Rate Band (frozen at £325,000 since 2009), but in other cases, it will be the result of the transferable nil rate band facility, as well as good lifetime planning utilising exemptions and reliefs.
A major tax saver is the inter-spouse exemption. Transfers between UK-domiciled spouses and civil partners, during life and on death, are exempt from IHT. This applies whether or not the spouses are living together but stops on divorce. If the transferor is UK domiciled but the spouse or civil partner is not, the exemption is equal to the prevailing Nil Rate Band – currently £325,000. A non-UK domiciled spouse can make an election to be treated as UK domiciled for IHT purposes, which will mean that transfers from their UK domiciled spouse/civil partner will then be completely exempt, but it will also mean that they will pay IHT on their worldwide assets.You can count on IHT questions turning up on your #CII #R03 exam. This article includes a useful example to help your exam revision. Click To Tweet
Changes to the Rules Pertaining to Deemed Domicile
Prior to April 2017, someone would be deemed to be UK domicile if they had been resident in the UK for 17 out of the last 20 years. Since 2017, this changed to 15 out of the last 20 years.
Also in 2017, a new category of deemed domicile known as ‘formerly domiciled resident’ was introduced. Someone will be classed as a formerly domiciled resident if they:
- are born in the UK with a UK domicile of origin
- have acquired another non-UK domicile of choice
- are now resident in the UK and were resident in the UK in at least 1 of the 2 previous tax years
The upshot of these rules is that they will be deemed domicile in the UK from the date they become UK resident again.
Transfers Between Spouses/Civil Partners
Remember too that any unused Inheritance Tax nil rate band can be transferred from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner – from £325,000 to as much as £650,000 in 2018/19, depending on the circumstances. The transfer must be claimed on the second death, within two years of the end of the month in which death occurs. Unused nil rate band on the first death is calculated as the available nil rate band on the first death (M) minus the nil rate band set against the chargeable transfer on that death (VT). The nil rate band maximum on second death is then increased by the same percentage that M – VT represents of the nil rate band maximum at the first death. This is best illustrated by an example.
Doris died in May 2007, leaving an estate of £300,000. She leaves £120,000 to her three children and the rest of her estate (£180,000) to her husband Boris. When Doris died the Inheritance Tax threshold was £300,000. Boris dies in September 2018, leaving an estate worth £500,000 which he leaves to his children. The amount of Doris’s threshold that can be transferred to Boris is:
- threshold at the time of the first death (Doris) = £300,000
- minus the legacies to her children who aren’t exempt = £120,000
- leaving a remaining threshold of £180,000
The percentage by which to increase the threshold on the second death (Boris) is:
- the threshold remaining from Doris’s death (£180,000)
- divided by the threshold at the time of Doris’s death (£300,000)
- multiplied by 100 (£180,000 ÷ £300,000 × 100 = 60%)
So the threshold available to transfer to Boris’s estate is £325,000 × 0.6 (60%) = £195,000. This is added to Boris’s own threshold of £325,000, increasing his threshold to £520,000. Because Boris’s estate is lower than this, there’s no Inheritance Tax to pay.
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