Top Tip – The 14-year rule for lifetime gifts anyone? – CII AF1, AF5, R03
We’ve all heard of it – but how many can remember how it works?
In very simple terms:
Make a PET, live 7 years and it’s exempt for IHT purposes.
Make a PET, die within 7 years and it’s in your estate for IHT purposes and will use up part of the NRB (or all if it’s big enough). (Remember to deduct annual exemptions if available).
But, if someone has made a series of gifts, then each gift is looked at and assessed against its own 7-year period to work out how much NRB is available to offset against it.
So if a chargeable lifetime transfer has been made up to 14 years before a settlor’s death (it’s usually as a result of making a transfer into a discretionary trust) this could have an impact on the IHT liability of a PET that later fails.
Year 1 = Chargeable transfer is made
Year 6 = PET is made
Year 12 – Death occurs
The chargeable transfer made in year 1 is made more than 7 years prior to death so isn’t subject to IHT in itself. However when working out the tax due on the PET, which has become chargeable due to being made 6 years before death, the CLT made in the 7 years prior to it has to be taken into account and so does affect the amount of IHT payable.
(The estate is calculated ignoring the CLT, just taking into account the PET as normal).
In summary, a chargeable transfer will impact the NRB available to subsequent PETs if death occurs within seven years of the PET and 14 years of the chargeable transfer so if there’s any possibility of clients making both CLTs and PETs, it’s important to be aware of the 14-year rule and if they can, it’s often better to make the PET before the CLT in particular if they can leave a good gap between them.
For resources to help you pass your AF1, AF5 or R03 exam, visit: http://www.brandft.co.uk/