R05 Asset protection and IHT exposure: free practice questions

1. Question 1 of 5

   Quentin dies leaving a cash-only estate of £560,000 to his niece. He made no lifetime gifts and has no transferable allowances or residence. What IHT is payable?

   Option A: £224,000Option B: £94,000Option C: £130,000Option D: £0

   Show answer

   The answer is B: £94,000

   £560,000 − £325,000 nil-rate band = £235,000 × 40% = £94,000. The residence nil-rate band does not apply to a cash estate passing to a niece.

   Why the other options are wrong

   A

   £224,000 charges 40% on the whole estate, ignoring the nil-rate band.

   C

   £130,000 is 40% of the nil-rate band itself, not of the excess over it.

   D

   The estate is above the £325,000 nil-rate band, so IHT is due.

2. Question 2 of 5

   What is the maximum combined nil-rate band allowance available to a married couple passing their home to their children, where both allowances are fully available?

   Option A: £1,000,000Option B: £1,300,000Option C: £825,000Option D: £650,000

   Show answer

   The answer is A: £1,000,000

   Each has a £325,000 nil-rate band and a £175,000 residence nil-rate band, giving a combined £1 million where the home passes to direct descendants and the estate is under £2 million.

   Why the other options are wrong

   B

   £1,300,000 overstates the total; each spouse has £325,000 + £175,000.

   C

   £825,000 doesn't match either allowance; two of each gives £1,000,000.

   D

   £650,000 is only the two standard nil-rate bands; the residence bands add £350,000.

3. Question 3 of 5

   Why can inheritance tax cause a practical problem for executors?

   Option A: The IHT bill usually has to be paid before the estate can be distributedOption B: HMRC collects the IHT directly from the beneficiaries ten years laterOption C: IHT is only payable once all of the estate's assets have been soldOption D: Executors are personally exempt from IHT on the estate they handle

   Show answer

   The answer is A: The IHT bill usually has to be paid before the estate can be distributed

   The IHT bill usually has to be paid before distribution, so executors may have to find the money themselves and reclaim it from the estate. Life cover in trust can provide liquidity.

   Why the other options are wrong

   B

   HMRC doesn't wait ten years; IHT is due much sooner.

   C

   IHT isn't only payable after all assets are sold; it's usually due before distribution.

   D

   Executors pay IHT from the estate; there's no personal exemption that removes the problem.

4. Question 4 of 5

   Why can a failed potentially exempt transfer leave other assets exposed to IHT?

   Option A: Failed PETs take first call on the available nil-rate bandOption B: Failed PETs are taxed at a higher rate of 60% on deathOption C: Failed PETs are added to the estate twiceOption D: Failed PETs cancel the spouse exemption for the rest of the estate

   Show answer

   The answer is A: Failed PETs take first call on the available nil-rate band

   If the donor dies within seven years, the failed PET takes first call on the nil-rate band, which can leave the rest of the estate taxable.

   Why the other options are wrong

   B

   A failed PET is charged at the normal death rate (with taper relief where it applies), not at 60%.

   C

   The gift is counted once; it's the order of set-off, taking the nil-rate band first, that exposes the rest of the estate.

   D

   A failed PET doesn't cancel the spouse exemption; the problem is that it uses up the nil-rate band first.

5. Question 5 of 5

   Why might protecting against inheritance tax be seen as less important than other protection needs?

   Option A: IHT only ever applies to business assets, not to homes or savingsOption B: IHT is never actually payable on estates at death, only on lifetime giftsOption C: IHT is always met by the State on behalf of the deceased's familyOption D: Beneficiaries are effectively paying tax on assets they have just received

   Show answer

   The answer is D: Beneficiaries are effectively paying tax on assets they have just received

   Unlike loss of income, IHT reduces an inheritance the beneficiaries receive. Many people still wish to reduce its impact and protect their assets.

   Why the other options are wrong

   A

   IHT applies to the whole estate, not just business assets.

   B

   IHT is payable on estates above the available nil-rate bands, so it can be a real cost.

   C

   The State doesn't pay IHT for families; the estate or beneficiaries bear it.

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