IHT - lifetime

Question 1

What are the two separate calculations that may be needed for tax?

Answer 1

1. Tax due immediately on making chargeable lifetime transfer (LCTs only)
2. Tax due as a result of the transferor dying within seven years of making a lifetime transfer (LCTs and Failed PETs)

Question 2

What is a Potentially Exempt Transfer (PET)?

Answer 2

A lifetime transfer of value to another individual, to bare trusts in favour of individual persons or trustees of a disabled trust.

Question 3

When does a Potentially Exempt Transfer (PET) become chargeable?

Answer 3

If the transferor dies within 7 years of making the transfer.

In this case, the PET fails and becomes chargeable for Inheritance Tax (IHT).

Question 4

What defines a Lifetime Chargeable Transfer (LCT)?

Answer 4

All lifetime transfers of value made by a person into a trust on or after 22 March 2006.

Question 5

What is the tax rate applied to Lifetime Chargeable Transfers (LCT) when they are made?

Answer 5

20%

Question 6

What happens if the transferor survives 7 years following a Lifetime Chargeable Transfer (LCT)?

Answer 6

There is no further charge to tax.

Question 7

What occurs if the transferor dies within 7 years of making a Lifetime Chargeable Transfer (LCT)?

Answer 7

The LCT will be reassessed to tax at the death rate using the NRB at the date of death.

Question 8

How is a cumulative total calculated?

Answer 8

Calculate Cumulative Total by adding up all the value of chargeable transfers in the 7 years prior to the transfer. This may involve looking back as far as 14 years before the transferor’s death.

Question 9

How is IHT calculated on lifetime transfers?

Answer 9

1. calculate cuulative total
2. Identify the value transferred
3. Apply exemptions and reliefs
4. Apply NRB and calculate tax

If you are reassessing a failed PET/LCT:
5. Apply taper relief
6. Give credit for tax paid in life

Question 10

How is the value transferred identified?

Answer 10

This includes gifts and TUVs. The value is calcuated by the loss of value to the donor.

Question 11

What exemptions and reliefs apply when calculating tax on lifetime transfers?

Answer 11

• spouse
• charity
• family maintenance
• annual
• marriage exemption
• small gifts allowance
• normal expenditure out of income
• BPR
• APR

Question 12

How is the available NRB calculated?

Answer 12

1. Establish NRB.
2. Reduce total NRB by value of cumulative total.
3. Apply 0% rate to the remaining taxable estate up to the total NRB amount.
4. Apply relevant rate to the rest.

Question 13

What are key points regarding NRB in lifetime IHT calculations?

Answer 13

• RNRB does not apply to lifetime transfers.
• NRB that applies to an LCT when first made is the NRB at date of transfer.
• NRB for a failed PET or re-assessed LCT is the NRB at time of death.

Question 14

What are the tax rates for IHT on Lifetime Transfers?

Answer 14

LCT tax payable is at a lifetime rate of 20%. Failed PETs and re-assessed LCTs tax payable at death rate of 40%. Taper relief applies if transferor dies 3-7 years after making the transfer.

Question 15

How is credit given for tax paid in lifetime?

Answer 15

Deduct the IHT paid previously from that due as a result of death. Only the balance needs to be paid; no refund is possible if negative.

Question 16

What is a summary of the steps to caclulate IHT on lifetime transfers?

Answer 16

1. Cumulative total
2. What is the value transferred
3. Exemptions and reliefs
4. NRB and tax

If they have since died and you are reevaluating a gift:
5. Taper relief
6. Credit for tax paid in life