R03 IHT valuation, liability and trusts: free practice questions

1. Question 1 of 5

   How are assets generally valued for IHT?

   Option A: At their value for income tax, such as the annual rental valueOption B: At the price they might reasonably fetch on the open marketOption C: At open market value less a discount for flooding the marketOption D: At their original cost to the person making the transfer

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   The answer is B: At the price they might reasonably fetch on the open market

   IHT values assets at the price they might reasonably fetch on the open market, with no reduction for the effect of putting a whole large holding on the market at once.

   Why the other options are wrong

   A

   IHT uses capital value on the open market.

   C

   No discount is allowed for selling a large holding at once.

   D

   Cost isn't the IHT valuation basis.

2. Question 2 of 5

   When must a chargeable lifetime transfer be grossed up?

   Option A: When the trustees receiving the gift pay the IHT on itOption B: Only on gifts made within seven years of deathOption C: Whenever the gift is made into any type of trustOption D: When the person making the gift also pays the IHT

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   The answer is D: When the person making the gift also pays the IHT

   If the donor pays the tax, the loss to their estate is the gift plus the tax, so the net gift is grossed up. If the trustees pay, the loss is just the gift.

   Why the other options are wrong

   A

   There's no grossing up if the donee pays.

   B

   Grossing up applies to lifetime tax when the donor pays.

   C

   It depends on who pays, not the trust type.

3. Question 3 of 5

   Tom dies on 10 March 2027. By when is the IHT on his estate due?

   Option A: 10 March 2028Option B: 31 January 2028Option C: 10 September 2027Option D: 30 September 2027

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   The answer is D: 30 September 2027

   IHT on a death estate is due six months after the end of the month in which death occurs: 30 September 2027. In practice it's often paid earlier because probate needs it.

   Why the other options are wrong

   A

   IHT is due six months after the end of the month of death.

   B

   That's a self assessment date.

   C

   It's six months after the end of the month of death, not the date of death.

4. Question 4 of 5

   How does the IHT treatment of a lifetime interest in possession trust created in 2004 differ from one created in 2010?

   Option A: The 2004 fund counts in the life tenant's estate; the 2010 trust is relevant propertyOption B: Both trusts are subject to periodic and exit charges as relevant propertyOption C: Both funds are treated as part of the life tenant's estateOption D: The 2004 trust's creation was a CLT; the 2010 trust's a PET

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   The answer is A: The 2004 fund counts in the life tenant's estate; the 2010 trust is relevant property

   Before 22 March 2006, creating a lifetime IIP trust was a PET and the fund counts in the life tenant's estate. Since then, it's generally a CLT, and the trust is subject to entry, exit and periodic charges.

   Why the other options are wrong

   B

   The pre-2006 trust isn't a relevant property trust.

   C

   Lifetime IIP trusts since 22 March 2006 are generally relevant property trusts.

   D

   It's the other way round.

5. Question 5 of 5

   How is an exit charge in the first ten years of a discretionary trust calculated?

   Option A: 30% of the lifetime rate on a hypothetical transfer, scaled by x/40 quartersOption B: 20% of the value distributed, above any available nil rate bandOption C: A flat 6% of the capital distributed, whatever the timingOption D: 40% of the value distributed, scaled down by years elapsed

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   The answer is A: 30% of the lifetime rate on a hypothetical transfer, scaled by x/40 quarters

   In the first ten years, the rate is 30% of the lifetime rate on a hypothetical transfer using the settlor's cumulation before the trust, multiplied by x/40, where x is the complete quarters since the trust began. Later exit charges use the last periodic rate.

   Why the other options are wrong

   B

   That's closer to the entry charge.

   C

   6% is a maximum, and the x/40 fraction applies.

   D

   The death rate isn't used.

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