Lifetime IHT planning

Written by Tina Winter
http://www.brandft.co.uk/

Lifetime transfers fall into the following four categories:

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

An exempt transfer is one that is not liable to IHT and not counted in the cumulation for the future. Other than inter-spouse exemption which we have looked at previously, the main exemptions are;

• 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  – there is also now 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 dying on active service

A potential 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 J01 and R03 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 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 are those which are neither exempt or 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.