general Inheritance Tax questions

[N. Sloane]

Hi,

I thought I knew the answers to the following questions, but now I'm not 100% sure, so I wonder if somebody could clarify them.

1) Where transfers are made that are "potentially exempt", I know that theyeat up your nil-rate band before the balance in excess of the NRB can become chargeable.

Now, I know they get 100% taper relief after seven years. However, say I make a transfer of £750,000 and the nil-rate band in twenty years time is £500,000. Do I assume that based on current legislation, that my nil-rateband is always going to be zero unless the nil-rate band exceeds the valueof the transfer ?

2) Assuming the above is the case, then there never will be a nil-rate bandto can be passed to a spouse ?


Thanks in advance if anyone can clear these points.

Rgds
Nigel.

 

[Robin]

Now, I know they get 100% taper relief after seven years. However,

say I make a transfer of £750,000 and the nil-rate band in twenty
years time is £500,000. Do I assume that based on current
legislation, that my nil-rate band is always going to be zero unless
the nil-rate band exceeds the value of the transfer ?

I may have misunderstood your question since if your transfer of
£750,000 is a gift to an individualthen after 20 years it does not
affect IHT on your estate. As HMRC say in their simple guide at
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#4
"Any gifts you make to individuals will be exempt from Inheritance Tax
as long as you live for seven years after making the gift."

Do you have in mind a transfer which is not potentially exempt - eg to a
trust? If so that too falls out of account after 7 years. See eg
http://www.hmrc.gov.uk/trusts/iht/transfers-in.htm#4

 

[N. Sloane]

No, I'm not talking about lifetime transfers into discretionary trusts.

I'm talking about normal PETs. As PETs take precedence over other assets inmaking up your nil-rate band, the relief is only effective with gifts in excess of the nil-rate band, because if they were less, there would be no tax to relieve.

But are you saying that after seven years, it totally falls out the estate (not just for tax relief purposes) and you get back any nil-rate band that you would have lost if you died within the first seven years ?

That's what I'm trying to clarify.

Thanks
Nigel.

 

[Robin]

But are you saying that after seven years, it totally falls out the

estate (not just for tax relief purposes) and you get back any
nil-rate band that you would have lost if you died within the first
seven years ?

Yep. The thing to focus on is that when you die IHT is calculated on
what your estate is then plus any chargeable gifts made in the previous
7 years, all worked out using the nil rate band as it is when you die.

 

[N. Sloane]

OK, thanks, that is a lot clearer to me know.

But in the back of my mind I was also thinking about what is known as the "14 year rule", where if you die and have a failed PET, you need to look back another seven years.

Does that only apply if you previously made a chargeable lifetime transfer to a discretionary trust ?

Also, I was looking this up earlier, and some literature states that you can offset two years of annual allowances (2 x £3,000 = £6,000) againsta PET. I always assumed that you would only use the allowances available the tax year you made the PET ? Do you know anything about that ?

I won't ask any more questions. I promise !!!

Thanks
Nigel.

 

[Robin]

But in the back of my mind I was also thinking about what is known as

the "14 year rule", where if you die and have a failed PET, you need
to look back another seven years.

Does that only apply if you previously made a chargeable lifetime
transfer to a discretionary trust ?

You are testing to destruction my memory of IHT So much so that I've
cheated and looked at this article from Scottish Widows in order to find
examples. (I've no connection with them but they and the other life
companies tend to have decent stuff on IHT for obvious reasons).

http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0226

As they set out, you are right that the "14 year rule" only comes into
play if there's a chargeable transfer in the 7 years before a PET which
was made less than 7 years before death.

Also, I was looking this up earlier, and some literature states that
you can offset two years of annual allowances (2 x £3,000 = £6,000)
against a PET. I always assumed that you would only use the
allowances available the tax year you made the PET ? Do you know
anything about that ?

I think that's just the result of the way you can carry forward any
unused part of the £3,000 annual exemption to the following year. See
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#2

 

[RobertL]

OK, thanks, that is a lot clearer to me know.



But in the back of my mind I was also thinking about what is known as the"14 year rule", where if you die and have a failed PET, you need to look back another seven years.

You are right that it is the tax that is tapered not the gift. THis point is often got wrong even in published self-help books on the subject. The gifts within the last seven years use up the nil band.

In addition, although the original legislation, I am told, did not specify the order in which to take the gifts off the nil band, HMRC invariably use the order in which the gifts were made thus maximising the tax take.

i think the 14 year rule is useful if you made a gift, say 7 years before you die that was the last in a series of "regular gifts out of income". To demonstrate that it qualified for a RGOOI that you need records going backbeyond the 7. the use of regular gifts out of income is a good way to reduce the tax bill.

Robert



RObert