Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query about the inheritance tax (IHT) implications of a late individual’s lifetime gifts to family members and trusts.
The tax query
‘A client died in January 2025, and I am endeavouring to understand the impact for inheritance tax purposes of various lifetime gifts that she made.
The first gift was in March 2011, when £300,000 was transferred to a discretionary trust for all her grandchildren. This gift was of course within the nil rate band, although the trust fund is now valued at around £500,000.
In February 2018 she gave £150,000 each to her two children. In April 2021 she added a further £100,000 to the grandchildren’s trust. Then in June 2024, as her health was failing, she gave a further £100,000 to each of her two children. She was advised that this would reduce her estate below £2m and thus preserve the availability of the residence nil rate band on her death.
The value of her estate on death in January 2025 has been calculated at £1,900,000 and her will leaves legacies of £500,000 to each of her two children and the residue to her brother and sister.
How is the inheritance tax calculated on each of the gifts and who pays it? It was of course assumed at the time of the addition to the trust that it was within the available nil rate band. Is it correct that the gifts in 2024 mean the residence nil rate band is available on death and, if so, who will get the benefit of it?’ Query 20,608– Executor.
Terry Jordan’s reply: Value at date of death is key
‘Executor’s query highlights the need to consider events as far back as 14 years from the date of a person’s death when calculating inheritance tax liabilities.
The gift to trust in March 2011 was immediately chargeable to IHT but the rate was nil as it was within the settlor’s nil rate band of £325,000. Ignoring the possible availability of annual exemption(s) throughout and assuming that the client did not benefit from transferred nil rate band from a predeceasing spouse or civil partner, the gift used £300,000 of the nil rate band. We are told that the trust fund is now worth around £500,000 but not the value at the date of the first ten-year charge in 2021. IHT would have been due at 6% on the taxable value above £325,000.
The February 2018 gifts totalling £300,000 to the two children were potentially exempt transfers (PETs) when made and would have fallen off the client’s clock in February 2025. Unfortunately, the client died in January this year and the failed PETs locked-in the March 2011 immediately chargeable transfer when calculating the IHT. The primary liability for tax on a failed PET is that of the recipient and, assuming the gifts were made on the same day, each child would be liable for £11,000 after taper relief.
The addition of £100,000 to the trust in April 2021 was an immediately chargeable transfer but at the time it was made there were no previous aggregable chargeable transfers (as the 2011 gift to trust was made more than seven years previously and the PETs had not failed). The client’s death brought the PETs into charge, so that £25,000 of the nil rate band was available to the chargeable transfer. After taper relief, the IHT liability is £24,000 and is that of the trustees. The transfer will need to be considered on the ten-year charge in 2031.
The June 2024 gifts totalling £200,000 became failed PETs and the children are liable to £40,000 IHT each, as the nil rate band was fully used and there is no taper relief.
One of the oddities of the residence band taper provisions is that it is the value of the estate on death that matters, disregarding any lifetime transfers, even if chargeable, and the band benefits the estate generally. Accordingly, the IHT on the client’s estate would apparently be £690,000 (£1.9m – £175,000 @ 40%). If the legacies to the children were expressed to be ‘free of’ IHT, they would each get £500,000 and the brother and sister would each get £105,000.’
The full article was published in Taxation magazine (issue 5008) and is available to subscribers here on the Taxation website.
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