techtalk
This article originally appeared in August 2012 edition of techtalk. Please visit www.scottishwidows.co.uk/techtalk for the latest issue.
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EDITORIAL: THOMAS COUGHLAN
INHERITANCE TAX: TAPER RELIEF
Taper relief is an inheritance tax (IHT) relief that offers a gradual reduction in the amount of
IHT due on gifts made within 7 years of death. A common misunderstanding is that taper relief
achieves its tax saving by reducing the transfer of value. This is not the case – the value of the
gift never changes, only the tax due.
The taper relief rates are as follows:
s part of
number
employers.
dvisers will
automatic
with record
nication as
No. of years between
gift and death:
Rate of relief
0–3
0%
3–4
20%
4–5
40%
5–6
60%
6–7
80%
POTENTIALLY EXEMPT TRANSFERS (PETS)
An outright gift to an individual or to a bare trust is a PET and has
no immediate IHT consequence (other than using up the client’s
annual exemption). Whether tax consequences arise subsequently
depends on the length of time the donee survives:
hange.
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Here are 2 examples demonstrating the application of taper relief
on a failed PET.
An example when taper relief doesn’t apply.
Stanley gives £300,000 to his son and dies 6 years later with
an estate worth £400,000. He was pre-deceased by his wife
who left her entire estate to him.
As he has died within 7 years the gift is a failed PET and is
included within his estate for IHT purposes:
• initial value of the gift was £294,000
(£300,000 – 2 x £3,000 annual exemptions)
• t his is the value that is included in the estate, and is
referred to as the ‘gross chargeable transfer (GCT)’.
There are 2 elements to consider here:
• if at least 7 years, the gift becomes exempt
• the tax due on the failed PET
• otherwise, the gift’s initial value is included within the donor’s
estate and may result in an IHT liability.
• the tax on the remaining estate.
For professional adviser use only, not to be relied upon by any other person.
The failed PET
Value of the PET:
£294,000
– less available nil-rate band:
(£650,000)*
Excess above nil-rate band:
£nil
As the failed PET is well within the available nil-rate band, it
does not itself bear any IHT. Consequently, there’s no need
to consider taper relief.
The remaining estate
Value of estate:
£400,000
– less available nil-rate band:
which is £650,000 – £294,000
(£356,000)
Excess above nil-rate band:
£44,000
As the estate is in excess of the remaining nil-rate band,
there’ll be an IHT liability, which the executors will normally
meet out of estate assets.
The IHT liability will be £17,600 (40% x £44,000).
*this assumes Stanley’s executors have claimed the unused nil-rate band of his wife.
As the example shows, transfers (including the deemed transfer of
the estate on death) are dealt with in chronological order. This
means earlier chargeable gifts use up the nil-rate band in preference
to later ones. Any gifts that fall wholly within the nil-rate band bear
no IHT and so taper relief need not be considered.
The amount of taper relief available is £11,040, reducing
the tax liability to £16,560 (£27,600 – £11,040).
IHT is normally paid by the recipient of the gift.
The remaining estate
Eve transfers £400,000 to a bare trust for her nephew
and dies 4 years and 6 months later with an estate worth
£100,000. Her executors only have 1 nil-rate band available.
As she’s died within 7 years the gift is a failed PET and is
included within her estate for IHT purposes:
• T
he GCT was £394,000 (£400,000 – 2 x £3,000
annual exemptions).
Considering the 2 elements (the PET and the estate)
separately.
Value of es
– less availa
Excess abov
Value of estate:
£100,000
– less available nil-rate band:
(£nil)
Excess above nil-rate band:
£100,000
There’s no remaining nil-rate band, and so the remaining
estate is liable for IHT at 40%. The IHT liability will be
£40,000 (40% x £100,000).
CHARGEABLE LIFETIME TRANSFERS (CLTS)
There is no
estate is lia
£200,000 (
MULTIPLE L
Where there a
work out the a
apply available
Taper relief applies to chargeable lifetime transfers (CLTs) as well
as PETs. Since 22 March 2006, a lifetime transfer to a trust other
than a bare trust is a CLT unless its value is covered by an available
exemption such as the annual exemption.
Multiple
That a CLT may result in a lifetime IHT liability means the application
of taper relief can result in a slightly different outcome.
1)£15
(GCT
Emily make
2)
£20
Taper relief following death within 7 years of a CLT
3)
£20
Ellie transfers £400,000 to a discretionary trust for her children
and dies 5 years and 1 month later with an estate worth
£500,000. Her executors only have 1 nil-rate band available.
4)
mil
E
£50
The initial CLT
An example when taper relief does apply
The rema
Transfer of value
£394,000
– less available nil-rate band
(£325,000)
Excess above nil-rate band:
£69,000
Lifetime IHT = £13,800 (20% of the excess above the nil-rate
band) paid by the trustees.
The CLT on death within 7 years
As she’s died within 7 years the CLT is also included within
her death estate for IHT purposes:
– The GCT was £394,000 (£400,000 – 2 x £3,000 annual
exemptions).
1)Mor
mad
esta
2)The
than
noti
avai
(£32
mad
1) w
band
Valu
– les
Exce
Value of the PET:
£394,000
– less available nil-rate band:
(£325,000)
The CLT exceeds her nil-rate band (say £350,000 at that time)
and so bears an IHT liability. The IHT liability on death is first
calculated at the full death rate. Then any taper relief is deducted.
Finally, the amount of any IHT paid in lifetime is deducted, to
give the amount of IHT now due.
Excess above nil-rate band:
£69,000
The IHT liability will be £17,600 (40% x £44,000).
The
As death occurred between 5 and 6 years after the CLT, taper
relief will be available at the rate of 60%.
As d
gift,
The
the
The failed PET
The failed PET exceeds her available nil-rate band and so
bears an IHT liability.
The IHT liability will be £27,600 (40% x £69,000).
As death occurred between 4 and 5 years after the gift,
taper relief will be available at the rate of 40%.
The amount of taper relief available is £10,560, reducing the
tax liability to £7,040 (£17,600 – £10,560). As this is lower
than the lifetime IHT that was paid, there’s no further liability
and the executors cannot reclaim any IHT.
The
and
Every care has been
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The remaining estate
Value of estate:
£500,000
– less available nil-rate band:
(£nil)
Excess above nil-rate band:
£500,000
There is no remaining nil-rate band and so the remaining
estate is liable for IHT at 40%. The IHT liability will be
£200,000 (40% x £500,000).
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will be
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3)The gift to her daughter was a PET and was made less
than 7 years before death. It, therefore, fails and is
notionally returned to the estate. The nil-rate band
available to the failed PET is the current nil-rate band
(£325,000) less the value of any chargeable transfer
made in the 7 years before the PET. As the PET in 2)
was made approximately 4 years before this PET and
has also become posthumously chargeable, it reduces
the nil-rate band that’s available. The transfer made in
1) is ignored as it was made more than seven years
previously.
MULTIPLE LIFETIME GIFTS
Value of the PET:
Where there are multiple failed PETs and/or CLTs it’s necessary to
work out the amount of nil-rate band that’s available to each and
apply available taper relief to each one separately.
– less available nil-rate band: (£131,000), which is £325,000 – £194,000
Excess above nil-rate band:
£194,000
£63,000
Multiple PETs / CLTs
The failed PET exceeds the available nil-rate band and
so bears an IHT liability.
Emily makes the following transfers:
The IHT liability will be £25,200 (40% x £63,000).
1)£156,000 to a discretionary trust in November 2000
(GCT was £150,000)
As death occurred less than 3 years after the gift,
taper relief won’t be available.
2)
£200,000 gift to her son in September 2006
3)
£200,000 gift to her daughter in July 2010
– less available nil-rate band: (£nil)
4)
mily dies in October 2012 with an estate worth
E
£500,000
Excess above nil-rate band:
1)More than 7 years have passed since the CLT was
made in 2000. This transfer is not included in the
estate, but may affect the IHT payable in 2).
2)The gift to her son was a PET and was made less
than 7 years before death. It, therefore, fails and is
notionally returned to the estate. The nil-rate band
available to the failed PET is the current nil-rate band
(£325,000) less the value of any chargeable transfers
made in the 7 years before the PET. As the transfer in
1) was made 6 years before, it reduces the nil-rate
band that’s available.
Value of the PET: £194,000 (£200,000 – 2 x £3,000)
– less available nil-rate band: (£175,000)
Excess above nil-rate band:
£19,000
The failed PET exceeds the available nil-rate band
and so bears an IHT liability.
The IHT liability will be £7,600 (40% x £19,000).
As death occurred between 6 and 7 years after the
gift, taper relief will be available at the rate of 80%.
The amount of taper relief available is £6,080, reducing
the tax liability to £1,520 (£7,600 – £6,080).
4)Value of estate:
£500,000
£500,000
The gifts to her son and daughter have used up the
entire nil-rate band, which means the remaining estate
is liable for IHT at 40%. The IHT liability will be £200,000
(40% x £500,000).
SUMMARY
When applying taper relief always remember
to use the ‘gross chargeable transfer’: that is
the amount of the transfer after deduction of
available exemptions. Then work out the nil-rate
band available to that transfer and only apply
taper relief to the excess above the available
nil-rate band. The application of taper relief
to a particular chargeable transfer does not
reduce the value of the GCT when considering
subsequent chargeable transfers.
Another point to note is where the settlor pays
the lifetime tax arising from a CLT, it is necessary to
include the tax paid when calculating the GCT.
Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change.
However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given.
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