R05 Question RE IHT
Snewton
Member
Hi,
I’m doing some past papers from the CII for R05 (the ones without the explanation on the correct answers) and am struggling to understand the rational behind the following question & answer. Id appreciate it if anyone could shed any light on it for me, thanks.
Lionel, aged 80, has assets exceeding £1,000,000 which he wants his daughter to inherit on his death. He has recently assigned by way of gift a £200,000 life assurance bond to her. It is the only gift he has made. Solely with regard to any Inheritance Tax liability that may indirectly arise because of the gift, what type of policy, if any, would it be reasonable to effect?
A. None.
B. Decreasing term assurance.
C. Level term assurance.
D. Whole of life assurance.
I assumed the correct response would be decreasing term because of the reduction in liability associated with the IHT over time (I appreciate a ‘gift inter vivos’ policy would’ve been a better answer really). What I don’t understand is the rationale behind a level term assurance (C) being the correct answer over the decreasing term, is it because of the stepped nature of IHT liability? or am i missing something in the wording?
Thanks
Comments
Hi Snewton,
Someone correct me if i'm wrong, put i believe it is because the gift would be a PET, on death within 7 years, the failed PET would use up the NRB FIRST before the estate (gift is less than NRB), therefore the NRB would reduce accordingly and more of the estate would become taxable as a result.
"no TAX, no TAPER" meaning as there is no tax on the gift in the NRB, no taper applies, the liability increase is just the value of the NRB used (gift amount) x 40% which won't change
ah i see, the level term is to offset the loss in the NRB rather than any direct IHT charge (which there wouldn't be on the gift because its below the NRB).
Personally I think the answer should be a) none because this gift is within the NRB. That is what I would have put and I sit R05 every year (and pass it 🤣)
Thanks Luiza, that fills me with confidence!
Level term assurance for £76,400 until the end of the seven years from when the gift was made.
This will cover the additional amount of iht that the estate will pay, because £194,000 of the nrb will be used by that gift on death in that period.
The question is testing whether you recognise:
* that there is an indirect tax consequence
* that it isn't a tapering liability
* that a level term policy is the correct type of cover