Financial Times Guide to Inheritance Tax, Probate and Estate Planning

168 Part 3

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Inheritance tax

Exempt beneciaries taking the residue of the

estate

In most circumstances, the IHT on the estate value is 40 per cent on the

excess over the nil rate band, as shown above. However, sometimes, a per-

son’s will requires that an exempt beneciary such as a charity or a spouse

will acquire the ‘residue’ (remainder) of the estate, after any legacies to

non-exempt beneciaries. If this is the case, it is not such a simple matter

of deducting the exemption, nil rate band and then taxing the excess at 40

per cent; a special calculation is required, as in the example below.

Example

Exempt beneciary calculation

Suzie died on 15 August 2009 leaving an estate worth £700,000. She had made no

lifetime gifts. The terms of her will were as follows:

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A legacy free of tax of £200,000 would go to her daughter Polly.

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A legacy free of tax of £200,000 would go to her son Keith.

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The remainder of her estate would go to her husband.

Suzie’s estate calculation would look like this:

£

The chargeable estate is £200,000 1 £200,000 400,000

Since the remainder is covered by the spouse exemption

Less 2009–10 nil band (325,000)

Chargeable to tax 75,000

Tax at (the special calculation) 2/3 5 £50,000

This special calculation then ensures the correct amount of tax is charged, as can

be seen.

In this way, tax is assessed on not only the non-exempt legacies but also on the tax

payable on those legacies out of the estate. The amount therefore available to the

spouse, after tax, is £700,000 less tax-free legacies of £400,000, less the tax due

of £50,000 5 £250,000. This will, of course, be covered by the spouse exemption.

Gross chargeable estate 700,000

Less spouse exemption, as calculated above (250,000)

Less nil band for 2009–10 (325,000)

Chargeable estate 125,000

Tax due: £125,000 at 40% 5 £50,000

Business property reliefs

Some assets attract additional reliefs. The reliefs available are business prop-

erty relief (BPR) and agricultural property relief (APR).

16

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Calculating inheritance tax liability on the death estate 169

Business property relief (BPR)

The types of property that will qualify for business property relief at a rate

of either 100 per cent or 50 per cent are:

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An unincorporated business or interest in a partnership (100%).

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Unquoted trading company shares, including AIM-listed shares

(100%).

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Unquoted trading company securities (such as debentures and loan

stock) provided the donor has a controlling interest based on share

ownership immediately before the gift (100%).

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Quoted trading company shares and securities provided the donor has

a controlling interest immediately before the gift (50%).

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Land, buildings and items of plant and machinery which are used

for the purposes of a trade in a partnership in which the individual

is a partner or a company in which the individual has a controlling

interest (50%).

Example

Business property relief

Stephanie, a single woman, has owned the following assets for more than two years

before her death in February 2010:

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A 45% interest, valued at £45,000, in the ordinary share capital of A Ltd, an

unquoted trading company. This asset qualies for BPR at 100%.

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A 15% interest in the ordinary share capital of B plc, a quoted trading

company. The 20,000 shares were valued on the stock exchange at 40p a

share at the date of Stephanie’s death. This asset doesn’t qualify for BPR.

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A 20% interest in the debentures of C Ltd, an unquoted trading company.

Although this holding is in an unquoted trading company, the asset is

‘securities’ which means that a controlling interest of at least 50% would be

required for BPR to be due. The securities were valued at £15,000 at the date

of Stephanie’s death.

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A share in a partnership in which she worked one day a week as a consultant.

BPR is due on this asset, as she is a partner. It is irrelevant how much time she

works for the partnership. Relief is available at 100%.

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An ofce block, valued at £1,000,000 which Stephanie rents out to the

partnership for use in the business. BPR of 50% is available to set against the

value of the ofces.

Stephanie’s estate calculation would look like this:

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