Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a fellow professional’s query about inheritance tax (IHT) liability for two transfers made on the same day.
The tax query
‘I am dealing with an estate where the deceased made a chargeable lifetime transfer (CLT) and potentially exempt transfer (PET) on the same day.
The potentially exempt transfer subsequently failed because of the earlier than expected death of the donor. I am trying to work out the liability and in particular how to use the nil rate band (NRB). Should it be apportioned between the two transfers or given to one of the transfers in preference to the other?
This got me thinking about how to advise clients in future. If they are intending to make transfers, one of which is a potentially exempt transfer and one a chargeable lifetime transfer. Is there any advantage from an inheritance tax perspective to having the two transfers occur on the same day or is it better than they should happen on different days. Readers’ thoughts would be gratefully received.’ Query 20,422 – Estate planner.
Terry Jordan’s reply: Both are liable to IHT.
‘Estate planner’s late client made an immediately chargeable transfer and a potentially exempt transfer on the same day and the latter failed on the client’s death within seven years so both are liable to IHT. Such circumstances are dealt with in IHTA 1984, s 266 (as explained in IHTM14591):
‘IHTA 1984, s 266(1)
Where the order of transfers made on the same day affects the value transferred (as where one or some of them have to be grossed up and another or others do not), you treat them as made in the order which results in the lowest value chargeable.
Thus you treat the ones to be grossed up as made first, so as to secure grossing-up (IHTM14593) at a lower rate.
IHTA 1984, s 266(2)
Where grossing does not apply, you calculate the value of the transfers as if they comprised a single transfer of the same total value. This applies whether you know the actual order of the transfers or not.
Example 1
Gordon, who has made no previous chargeable transfers, makes five chargeable transfers each of £40,000 on the same date.
The tax on each is one fifth of the tax on a single transfer of £200,000.
Both s 266(1) and (2) are capable of operating together on gifts made on a single day.
Example 2
Gordon on the same day makes
- two chargeable transfers on which he bears the tax, and
- three chargeable transfers on which his donees bear the tax.
Under IHTA 1984, s 266(1), the two transfers will be treated as made before the three. IHTA 1984, s 266(2) also applies separately to the set of two transfers and the set of three, giving an overall effective rate to each set by treating it as a single transfer of its total value.
These rules do not apply to the transfer on death, so where lifetime gifts are made on the day of a person’s death, you will always treat the lifetime gifts as made first.’
Estate planner asks how to advise clients in future. Most immediately chargeable lifetime transfers are in respect of gifts into relevant property (nowadays including most interest in possession) trusts. These should ideally be made at least one day before any PETs are made. Otherwise, if the PETs fail, they will have a knock-on effect on the future periodic and proportionate or exit charges on the trust. It is also worth remembering that if a PET fails on death within seven years, when calculating the IHT it may be necessary to aggregate an immediately chargeable transfer made within the period of seven years before the PET even if that transfer was itself made more than seven years before death.’
The full article was published in Taxation magazine (issue 4961) and is available to subscribers here on the Taxation website.
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