Chartered Institute of Taxation (CIOT / CTA) Inheritance Tax, Trusts and Estates Advisory Syllabus

Inheritance Tax, Trusts and Estates Advisory syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Inheritance Tax, Trusts and Estates Advisory in Chartered Institute of Taxation (CIOT / CTA), not a summary of it.

1. 1

   Inheritance Tax in Depth

   4 topics

   • Lifetime transfers and the death estate
     • Cumulation and the seven-year rule
     • Taper relief and fall in value relief
   • Valuation and related property
     • Related property and quoted/unquoted shares
     • Loss on sale relief for shares and land
   • Business and agricultural property relief
     • Relevant business property and excepted assets
     • Recent caps and reforms to BPR and APR
   • Gifts with reservation and pre-owned assets
2. 2

   Taxation of Trusts

   4 topics

   • Types of trust and their tax treatment
     • Bare, interest in possession and discretionary trusts
     • Settlor-interested trusts
   • Relevant property regime
     • Entry, principal (ten-year) and exit charges
     • Calculation of the effective rate
   • Income tax on trusts
     • Standard rate band and trust rates
     • Tax pool and beneficiary credits
   • Capital gains tax for trustees and gift relief
3. 3

   Estates and Post-Death Planning

   4 topics

   • Administration of estates
     • Income and gains during administration
     • Beneficiary taxation and R185 statements
   • Deeds of variation and disclaimers
   • Quick succession relief and double charges relief
   • Estate planning with trusts and gifting strategies

Inheritance Tax, Trusts and Estates Advisory flashcards for Chartered Institute of Taxation (CIOT / CTA)

25 of 49 cards from the Inheritance Tax, Trusts and Estates Advisory deck — real questions with worked answers.

1. What is a Potentially Exempt Transfer (PET) for Inheritance Tax (IHT) purposes?

   A PET is a lifetime gift from one individual to another individual (or to a disabled trust or bereaved minor's trust). It is exempt at the time it is made and becomes wholly exempt if the donor survives 7 years; it only becomes chargeable if the donor dies within 7 years.

2. What is a Chargeable Lifetime Transfer (CLT) and how is it taxed at the point of gift?

   A CLT is a lifetime transfer into most trusts (relevant property trusts). It is immediately chargeable to IHT. If the donor pays the tax, lifetime tax is charged at $\frac{20}{80} = 25\%$ (grossed up) on the excess over the nil rate band; if the trustees pay, the rate is $20\%$.

3. What is the IHT nil rate band (NRB) and the residence nil rate band (RNRB) for 2024/25?

   The standard NRB is £325,000 (taxed at $0\%$). The RNRB is £175,000, available when a residence is passed to direct descendants. The RNRB tapers by £1 for every £2 the estate exceeds £2,000,000.

4. How does the 7-year cumulation period work for lifetime transfers?

   When computing the NRB available for a chargeable transfer, you cumulate all chargeable transfers in the 7 years prior to that transfer. Transfers more than 7 years before fall out of cumulation. The available NRB is the current NRB less gross chargeable transfers in the preceding 7 years.

5. What is taper relief and how does it reduce IHT on death?

   Taper relief reduces the IHT payable (not the transfer value) on gifts made 3 to 7 years before death. Reductions: 3-4 yrs $20\%$, 4-5 yrs $40\%$, 5-6 yrs $60\%$, 6-7 yrs $80\%$. It only applies if the gift exceeds the NRB so that tax is actually payable.

6. List the main IHT exemptions available for lifetime transfers.

   Annual exemption (£3,000, with one year carry-forward), small gifts exemption (£250 per donee), normal expenditure out of income, marriage/civil partnership gifts (£5,000 parent, £2,500 grandparent, £1,000 other), and the spouse/civil partner exemption (unlimited if recipient is UK domiciled).

7. How is the death estate valued for IHT, and what is the general valuation rule?

   Assets are valued at their open market value immediately before death (s.160 IHTA 1984) — the price they would fetch on a sale in the open market. The estate value is reduced by allowable debts, funeral expenses and reliefs/exemptions.

8. What is the related property valuation rule and why does it exist?

   Related property (e.g. assets owned by a spouse, or property given to a charity within the last 5 years) is valued together with the taxpayer's property if this produces a higher value. It prevents spouses splitting assets (such as a set of items or a controlling shareholding) to reduce their combined value.

9. Give the related property valuation formula for a part-holding.

   The value of the taxpayer's holding is: $$\text{Value} = \frac{a}{a+b} \times (\text{value of the combined holding})$$ where $a$ is the value of the taxpayer's property valued alone and $b$ is the value of the related (e.g. spouse's) property valued alone.

10. How are quoted shares valued for IHT at death?

    Quoted shares are valued at the quarter-up price: take the lower quoted price plus one quarter of the difference between the lower and higher prices. Alternatively the average of the highest and lowest marked bargains can be used if lower.

11. What conditions must be met for Business Property Relief (BPR) and at what rates is it given?

    The property must be relevant business property owned for at least 2 years. Relief is $100\%$ for an unincorporated business, an interest in a partnership, and unquoted shares; and $50\%$ for quoted shares giving control, and land/buildings/machinery used by a company the transferor controls or a partnership.

12. What businesses are excluded from Business Property Relief?

    Businesses consisting wholly or mainly of dealing in securities, stocks or shares, land or buildings, or the making or holding of investments (i.e. mainly investment businesses). 'Wholly or mainly' means more than $50\%$.

13. What is the treatment of excepted assets for Business Property Relief?

    Excepted assets — those not used wholly or mainly for business purposes in the last 2 years and not required for future use — are excluded from BPR. Relief is restricted to the proportion of the business value attributable to qualifying (non-excepted) assets.

14. What conditions and rates apply to Agricultural Property Relief (APR)?

    APR applies to the agricultural value of agricultural property. Relief is $100\%$ if the transferor had vacant possession (or right to it within 12 months / 24 months) or property let on/after 1 Sept 1995; otherwise $50\%$. Ownership period: 2 years if owner-occupied, 7 years if let.

15. How do APR and BPR interact, and which applies first?

    APR is given first on the agricultural value. BPR may then apply to any excess value (e.g. development value or farming business assets) not covered by APR, provided the BPR conditions are met. Relief is never given twice on the same value.

16. What are the BPR/APR clawback conditions where a lifetime gift becomes chargeable on death?

    For relief to remain on a failed PET or CLT taxed on death, the original property (or qualifying replacement) must still be owned by the donee at the donor's death (or earlier death of donee) and still qualify as relevant business/agricultural property at that date.

17. What is a Gift With Reservation of Benefit (GWR) and what is its IHT consequence?

    A GWR is a gift where the donor retains a benefit (e.g. gives away a house but continues to live in it rent-free). The asset remains in the donor's death estate at its value at the date of death, even though legal ownership passed, unless the reservation ceased earlier.

18. How does the double-charge avoidance work where a GWR also fails as a PET?

    A GWR can be caught twice: as a failed PET (value at gift) and as property in the death estate (value at death). The Double Charges Regulations compare the two calculations and charge IHT only on whichever gives the higher tax, relieving the lower charge.

19. What is the Pre-Owned Assets Tax (POAT) and when does it apply?

    POAT is an income tax charge on the benefit of continuing to use an asset (land, chattels, or intangibles in settlor-interested trusts) previously owned/funded by the taxpayer, where the GWR rules do not apply. It taxes the deemed annual rental/notional value as a benefit in kind.

20. Distinguish a bare trust from an interest in possession (IIP) trust for tax purposes.

    A bare trust holds property as nominee for an absolutely entitled beneficiary — the beneficiary is treated as owning the assets directly for IHT, IT and CGT. An IIP trust gives a beneficiary (the life tenant) a present right to income; the trust holds legal title and the income belongs to the life tenant.

21. What is a discretionary trust and how is it treated for IHT?

    A discretionary trust gives trustees discretion over who benefits and how much. No beneficiary has an interest in possession. It falls within the relevant property regime, suffering IHT entry charges, 10-year principal (anniversary) charges, and exit charges.

22. How is an immediate post-death interest (IPDI) treated for IHT?

    An IPDI is an IIP trust created by will or intestacy where the beneficiary becomes entitled on the death. It is taxed under the old IIP rules: the trust property forms part of the life tenant's estate for IHT, so it is NOT relevant property and escapes the 10-year/exit charges.

23. What is the relevant property regime and which trusts does it cover?

    The relevant property regime applies IHT periodic and exit charges to most trusts created after 22 March 2006, including discretionary trusts and most lifetime IIP trusts. Exceptions include bare trusts, IPDIs, disabled person's trusts and bereaved minors' trusts.

24. How is the IHT entry charge on a relevant property trust calculated?

    The CLT is taxed at the lifetime rate on the excess over the available NRB (after deducting the settlor's chargeable transfers in the prior 7 years). Trustees pay at $20\%$; if the settlor pays, the value is grossed up at $\frac{1}{4}$ giving an effective $25\%$.

25. What is the maximum rate of the 10-year (principal) charge on a relevant property trust?

    The maximum effective rate is $6\%$ ($30\%$ of the lifetime rate of $20\%$). The actual rate is usually lower because it is based on an assumed transfer using the available nil rate band against the value of the relevant property at the anniversary.

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