Inheritance Tax Part 2 Flashcards
What do you need to consider with regards to calculating the value of a PET or CLT?
Ensure you have taken off the previous year (if available) and current years’ annual exempt amount of £3,000.
If a failed PET becomes chargeable, what rate of IHT is payable?
40%
How does lifetime tax interact with taper relief?
Lifetime IHT tax can be offset again death tax, but only to the point whereby it brings the IHT due on death to 0.
Key consideration in terms of calculating IHT on the estate and lifetimes transfers?
There are two separate calculations which need to be completed. A calculation for IHT on lifetime transfers and a calculation for IHT on the estate. These do not interact with each other.
Consideration surround calculating IHT on lifetime transfers
We revisit each lifetime transfer in turn for the seven years prior to death, including PETs that have now become chargeable, to see what tax would have been paid at the time they were made.
This could pick-up chargeable transfers in the seven years prior to the transfer in question, which means that chargeable transfers made up to 14 years before death could still influence IHT payable – this is the so called ’14-year rule’.
Each transfer is looked at as a separate calculation, using the current nil rate band and any available transferable nil rate band each time. However, the residence nil rate band cannot be used.
Explain the 14-year rule
The 7-year rule can become the 14-year rule. This happens when a person has made a CLT and, less than 7 years later, makes a PET.
If that person dies within 7 years of having made the PET, then both the original CLT and the subsequent PET are added back on to the total estate for IHT purposes.
This happens because the NRB is set against the gifts in chronological order. Until the first 7-year period (immediately after the original CLT) has expired, the gifter’s IHT nil rate band has not ‘refreshed’ and is therefore not available to be set against the second gift, the failed PET.
EVERY 7 YEARS THE NRB RESETS
Key consideration surround years to look back and 14 year rule?
We are generally looking back for CLTs in the 7 years before a transfer that we are reviewing, however any failed PETs would also affect the calculations. Past the 7 years before death point however, only CLTs would appear, as a PET that was made over 7 years ago is now fully exempt and has not become a failed PET.
