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Hello Sir, please help me understand this scenario:
Dembe, who knows nothing about inheritance tax (IHT), is concerned about the amount of IHT which will be payable when she and Kato die. The couple’s combined chargeable estate is valued at £880,000 for IHT purposes. The estate includes a main residence valued at £360,000. Under the terms of their wills, Dembe and Kato have initially left their entire estates to eachother. Then when the second of them dies, the total estate of £880,000 will be left to the couple’s children.
The couple are not sure whether to change the terms of their wills so that assets worth
£325,000 are left to their children when the first of them dies.
Neither Dembe nor Kato have made any lifetime gifts.QUESTION: explain whether or not it might be beneficial to leave assets
worth £325,000 to their children when the first of them dies. ?
Note: You should assume that the IHT rates and thresholds remain unchanged.
Answer:
”Even if IHT were payable (for example, if the value of the estate increases faster than the available nil rate bands), then there is no advantage to leaving assets to children on the first death. This is because unused nil rate bands can be transferred to the
surviving spouse. ”I don’t get this, if the value of assets exceed NRBs on the second later death then how is not beneficial to utilize the NRB on the first death itself as the value of assets at that time would be covered by NRB. I mean wouldnt the unused nil rate band be short of the estate value in future??
I really hope you get my doubt :/ please help
Hopefully you understand the concept of the transfer of the unused NRB and the Residence NRB and you have watched all of the lectures.
If the first spouse to die leaves all his / her assets to the spouse then no IHT will be payable as it is an exempt transfer – the surviving spouse would then be able to make a lifetime transfer (PET) if they wished, to the children and if they survived for 7 years no IHT would be payable on death.
Even if no lifetime transfers were made by the surviving spouse the transfer of both the unused NRB and the Residence NRB should be sufficient to ensure that no IHT is payable on the death of that surviving spouse
There is no benefit therefore to be achieved in making gifts to the children on the death of the first spouseI mean, wouldn’t the assets increase in their value by the time the second spouse dies?
and that increased value is more than both the surviving spouse’s own plus the dead spouse’s unused NRBS?Ya I absolutely agree with @draiells sir!
Could you shed some more light on the point raised by draiells.
@draiells, i have ben following up with your questions on both platforms of ask ACCA tutor of F5 and F6, and your quality of questions just seem to be getting better and better. It’s said that “a man’s mark of intelligence lies in the questions he asks”. Really appreciate your intellect!
If possible do post your marks in both papers once you get them(assuming you’ll be sitting for F5 and F6 this September only)! I’ll also share mine, here on Ask ACCA TX-UK tutor. Please don’t mind sir!
Hi,
I had the same doubt regarding this question and therefore sharing what I understood. Please correct me if I am wrong.
The question asks us to assume that today is 15th feb 2020.
The assets might have appreciated from 15th feb 2020 to the first death, but there will be no IHT payable as there will be spouse exemption. The question also states that both Dembe and Kato are to die in the near future. Therefore we can assume that there isn’t much time gap between the first and second death and thus no appreciation between the first and second death.
But on the second death , IHT will be payable if the assets have appreciated from 15th feb 2020 to the first death, which was not payable on the first death because of spouse exemption.
This is what they mean by “Even if IHT were payable (for example, if the value of the estate increases faster than the available nil rate bands)”. They are talking about the appreciation from 15th feb 2020 to the first death.
Therefore, if there is no appreciation between the first and second death, leaving the assets worth 325000 to children after first death and keeping them in the estate till the second death will have the same effect and thus no tax saving.@anakha, hey I too tried to explain this to myself this way, and it totally makes sense! But I still wanted to be sure. It could be either ways, the appreciation being greater/lesser than the available NRBs. I hope we are not missing any points.
@Noah098, I feel flattered lol, thanks im assuming the saying applies to women too 😛 … I surely will share my results! Good luck to you, I’m just freaking out over having to give remote exams and also the unexpected complex questions that could show up in F5 section C.
Guys you are making way too much over this – it is not a matter of technical knowledge that is the issue here it is simply a matter of assumptions.
This is a written question and you can state assumptions – personally I would not have bothered including the “offending” statement in my answer – but look at the numbers – the combined estate is currently £880,000 – the combined nil rate bands on the second death just using current levels amount to £950,000!
Also look at the wording of the question – “Then when the second of them dies, the total estate of £880,000 will be left to the couple’s children”, again using the 880,000 figure.
In my answer above to your query I have also said about the surviving spouse being able to use lifetime transfers.
If you had written all of the other points but also noted the issue about (significant) increase in value there is no problem with that!Extremely sorry to bother you over this, and thanks a million to clear it to us, Sir!!
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