This should include PETs that have now become chargeable, to see what tax would have been paid at the time they were made.
This could pick up chargeable transfers in the seven years prior to the transfer in question, which means that chargeable transfers made up to 14 years before death could still influence IHT payable.
This is the 14-year rule.
Each transfer is looked at as a separate calculation, each time using the current nil-rate band and any available transferable nil-rate band. However, the RNRB cannot be used.
Taper relief may reduce the amount of tax paid on lifetime transfers made more than three years before death. Remember that if the cumulative value of the transfers is within the available nil-rate band, then there will be no taper relief.
To illustrate how all of this works, let us look at an example.
The case of Alec, Jack and Jill
Alec is a single parent of two children, Jack and Jill, and grandfather to five grandchildren.
His gifting history is as follows:
Year one – £300,000 into a discretionary trust (CLT)
Year four – £100,000 gift to Jack (PET)
Year seven – £50,000 gift to Jill (PET)
Year nine – £75,000 into discretionary trust (CLT)
Year 13 – Alec dies with estate of £800,000 (including family home valued at £400,000). The whole estate is to be split between his two children.
For this example, let us assume the gifts are made on the same date each year and the £3,000 annual allowance is already used.
To calculate the IHT on the estate:
The transfers in year nine (£75,000 CLT) and year seven (£50,000 PET to Jill) will be included in the estate at death.
Alec is entitled to a nil-rate band of £325,000 and the RNRB of £175,000. However, his standard nil-rate band of £325,000 is reduced by the two transfers within seven years of death (£75,000 + £50,000) leaving £200,000 of available nil-rate band. It is important to note that lifetime transfers do not reduce any RNRB.
So, the tax on the estate is (£800,000 - £200,000 - £175,000) x 40 per cent = £170,000.
To calculate the IHT on the lifetime transfers:
We must also look back to reassess what tax would have been paid on the lifetime transfers in the last seven years. Each time we will perform a fresh calculation, starting with the full current nil-rate band.
The PET made to Jill in year seven has now become chargeable. We must include any chargeable transfers in the years prior to the gift to calculate the tax due. This will include the £300,000 CLT made in year one but not the PET made to Jack in year four. This has become exempt because it was made more than seven years before Alec’s death.
The total £350,000 exceeds the current nil-rate band by £25,000. This means there will be an IHT liability of £10,000 (£25,000 x 40 per cent). This would be further reduced by taper relief. As Alec died between six and seven years from the date of the gift to Jill, only 20 per cent of the IHT due will be taxable, leaving a tax bill of £2,000 for Jill to pay.
