ACCA TX ^UK Syllabus D. Inheritance Tax - IHT liability on the death estate - Past Papers ^{2 / 4}

Adana died on 17 March 2016, and inheritance tax (IHT) of £566,000 is payable in respect of her chargeable estate.

Under the terms of her will, Adana left her entire estate to her children.

At the date of her death, Adana had the following debts and liabilities:

(1) An outstanding interest-only mortgage of £220,000.
(2) Income tax of £43,700 payable in respect of the tax year 2015–16.
(3) Legal fees of £4,600 incurred by Adana’s sister which Adana had verbally promised to pay.

Adana’s husband had died on 28 May 2006, and only 20% of his inheritance tax nil rate band was used on his death. The nil rate band for the tax year 2006–07 was £285,000.

On 22 April 2006, Adana had made a chargeable lifetime transfer of shares valued at £500,000 to a trust. 
Adana paid the lifetime IHT of £52,250 arising from this gift. If Adana had not made this gift, her chargeable estate at the time of her death would have been £650,000 higher than it otherwise was. This was because of the subsequent increase in the value of the gifted shares.

What is the total amount of deductions which would have been permitted in calculating Adana’s chargeable estate for IHT purposes?

A £263,700
B £268,300
C £43,700
D £220,000

James died on 22 January 2015. He had made the following gifts during his lifetime:

(1) On 9 October 2007, a cash gift of £35,000 to a trust. No lifetime inheritance tax was payable in respect of this gift.

(2) On 14 May 2013, a cash gift of £420,000 to his daughter.

(3) On 2 August 2013, a gift of a property valued at £260,000 to a trust. No lifetime inheritance tax was payable in respect of this gift because it was covered by the nil rate band. By the time of James’ death on 22 January 2015, the property had increased in value to £310,000.

On 22 January 2015, James’ estate was valued at £870,000. Under the terms of his will, James left his entire estate to his children.

The nil rate band of James’ wife was fully utilised when she died ten years ago.

The nil rate band for the tax year 2007–08 is £300,000, and for the tax year 2013–14 it is £325,000.

Required:
(a) Calculate the inheritance tax which will be payable as a result of James’ death, and state who will be responsible for paying the tax. (6 marks)

Which of the following are NOT deducted when calculating the value of a person’s chargeable estate for inheritance tax purposes?

(1) An outstanding repayment mortgage
(2) Funeral expenses
(3) An outstanding interest-only mortgage
(4) An outstanding endowment mortgage
(5) A verbal promise to pay a friend’s debt
(6) Credit card debts

A. 1, 2 and 6
B. 4 and 5
C. 3 and 5
D. 1, 3 and 4

You should assume that today’s date is 15 March 2014.
Tobias has recently inherited the residue of his aunt Mildred’s estate. Mildred died on 8 December 2013, and her estate consisted of the following assets:

(1) A main residence valued at £660,000. This had an outstanding interest-only mortgage of £94,300.

(2) A portfolio of ordinary shares valued at £192,600.

(3) A motor car valued at £21,900.

On 8 December 2013, Mildred owed £9,400 in respect of credit card debts, and she had also verbally promised to pay the £4,600 medical costs of a friend. The cost of Mildred’s funeral amounted to £5,800.

Under the terms of her will, Mildred made specific legacies totalling £25,000 to her friends, with the residue of her estate being inherited by Tobias. Mildred had not made any gifts during her lifetime.

Mildred’s husband had died on 19 July 2006, and 40% of his inheritance tax nil rate band of £285,000 for the tax year 2006–07 was not used.

Required:
(a) Calculate the amount of the inheritance which Tobias will have received (after tax) from his aunt Mildred’s estate. (7 marks)