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Example 4
Ja died on 18 March 2014 leaving an estate valued at £450,000. She had made the following lifetime gifts:
• 1 August 2005 – A gift of £200,000 to a trust
• 1 November 2011 – A gift of £280,000 to a trust
These figures are after deducting available exemptions. In each case the trust paid any IHT arising from the gift.
The nil rate band for the tax year 2005–06 is £275,000, and for the tax year 2011–12 it is £325,000.
IHT liabilities are as follows:
Lifetime transfers
1 August 2005
£
Chargeable transfer 200,000• No lifetime IHT is payable as the CLT is less than the nil rate band for 2005-06.
1 November 2011
£
Chargeable transfer 280,000IHT liability
125,000 at nil%
155,000 at 20%
0
31,000
31,000• The CLT made on 1 August 2005 is within seven years of 1 November 2011, so it utilises £200,000 of the nil rate band for 2011-12.
Additional liabilities arising on death
1 August 2005
£
Chargeable transfer 200,000• There is no additional liability as this CLT was made more than seven years before the date of Ja’s death on 18 March 2014.
1 November 2011
£
Chargeable transfer 280,000IHT liability
125,000 at nil%
155,000 at 40%
0
62,000
IHT already paid (31,000)
Additional liability 31,000• The CLT made on 1 August 2005 utilises £200,000 of the nil rate band for 2013-14 of £325,000.
Death estate
£
Chargeable estate 450,000IHT liability
45,000 at nil%
405,000 at 40%
0
162,000
162,000• The CLT made on 1 August 2005 is not relevant when calculating the IHT on the death estate as it was made more than seven years before the date of Ja’s death on 18 March 2014.
• Therefore only the CLT made on 1 November 2011 is taken into account, and this utilises £280,000 of the nil rate band of £325,000.My confusion is that Nil Rate Band is for lifetime… So in this problem 200000 is already used in 2005 for the first CLT, then 125000 is used @ death for the 2nd CLT.
The nil band is done…. Then how come the other 45000 (325-280) is being deducted from the death estate IHT liability ?
I would first advise for you to work through the OT course notes and watch the lecture on Chapter 23, noting especially on this issue, section 9 – the 7 year cumulation period and the example that follows.
When dealing with CLT’s in lifetime we work on a 7 year cumulation basis. This means that in computing the lifetime tax on any CLT made, the available nil rate band at that date will be the then nil rate band reduced by the gross CLT’s made within the preceding 7 years such as you see in the example above.
If therefore you were now planning to make a transfer into a trust (CLT) and you had made a previous CLT of £400,000 six and a half years ago it would mean that if you made that transfer in the next 6 months there is no nil rate band available to you, but if you waited for 6 months the earlier CLT would no longer be relevant so that £325,000 of the CLT could now be made within the nil rate band.In the example above the November 2011 CLT is within 7 years of the August 2005 CLT.
On the death of the taxpayer the IHT on death is only payable on the November 2011 CLT as only it falls within the 7 years of death. The available nil rate band at the date of death, however is again deemed to have been used by any CLT’s made within the 7 years before it so again only 125,000 nil rate band is available. The 2005 CLT ceases to have a cumulative effect in August 2012 so is not therefore relevant in computing how much nil rate band is available against the death estate. The only transfer within the 7 years of death is the 2011 CLT of 280,000 and hence 45,000 nil rate band is available to the death estate.
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