What are the 4 categories of Lifetime Transfers?

Learn about the four types of lifetime transfers as you revise for your CII AF1, AF5, R03 or R06 exam.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2018/19.

Lifetime transfers fall into the following four categories:

• Exempt
• Potentially Exempt
• Chargeable but not taxable
• Chargeable and taxable

Exempt Transfers

An exempt transfer is one that is not liable to IHT and not counted in the cumulation for the future.  The main exemptions are;

• Spouse/civil partner exemption – married couples and civil partners that are UK-domiciled can pass all of their estate to each other free of IHT with no limit
• Annual exemption of £3,000 per tax year – the unused balance from one tax year can be carried forward to the next
• Small gifts exemption – gifts of up to £250 per tax year in any one tax year are exempt
• Normal expenditure out of income – regular gifts that leave the transferor with sufficient income to maintain their normal standard of living
• Gifts on  marriage with specified limits
• Gifts to charities or political parties  – tax free during lifetime and on death – in addition, there is a reduced IHT rate of 36% where at least 10% of an estate is left to charity
• Gifts for the national benefit
• Estates of members of the armed forces whose death can be attributed to injury or illness suffered whilst on active service. This has also been extended to members of the emergency service and humanitarian aid workers responding to emergency circumstances.

Potentially Exempt Transfers

A potentially exempt transfer (PET) is one that is not liable to IHT at the time of the gift but is counted in the cumulation for the future, and is a favourite of R03 and AF1 examiners. They are gifts, not covered by exemptions, by individuals to other individuals or to bare trusts or disabled trusts. If the transferor dies within seven years of making the gift, the transfer becomes chargeable with taper relief available on any tax where death occurs within 3 – 7 years, as below:

• Between 3 and 4 years – 20% reduction
• Between 4 and 5 years – 40% reduction
• Between 5 and 6 years – 60% reduction
• Between 6 and 7 years – 80% reduction

Chargeable Lifetime Transfers

Chargeable lifetime transfers are those which are neither exempt nor potentially exempt – the most common are gifts to trusts which are neither bare trusts nor for disabled beneficiaries. If such gifts are made within the nil rate band, then they are chargeable, although no IHT is payable at the time of the gifts. They would however be taken into account on the donor’s death and would mean less of the nil rate band available to set against the death estate. Complications arise when PETs are also made and subsequently become retrospectively chargeable on death, increasing the cumulation to take it over the nil rate band.

Chargeable lifetime transfers in excess of the nil rate band will result in a tax charge of the lifetime rate of 20% of the excess, with no further IHT to pay if the donor survives seven years. If the donor doesn’t survive seven years, then death rates will apply retrospectively, with relief given for the lifetime tax paid.

Grab the resources you need!

If you’re studying for your CII AF1 exam, and you’re wanting to feel confident on exam day, you’ll need to prepare as much as possible. Grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF1 calculation workbook taster now!

Alternatively, you can download a taster resource for AF5, R03 or R06 if you are revising for one of those exams.