- This topic has 5 replies, 2 voices, and was last updated 2 weeks ago by
.
- Posts
Dear tutor,
in the question 2 of the gross chargeable transfer (GCT) carried forward in Illustration 3 – Chapter 23 Inheritance tax of Opentuition’s Note for Taxation (TX-UK) – FA2023:
a. Why the GCT carried forward in case the donee pays IHT is different with that in case the doner pays IHT?
b. Should the GCT in the first case be like this: Taxable amount £119,000 + £23800 = £142,800?
c. Can you please also explain how to calculate GCT? I feel like getting lost understanding the concept.
Thank you!
“Ronald created a discretionary trust on 1 June 2023 and transferred £450,000 to the trustees. The
trustees agreed to pay the IHT due.1. Assuming Ronald has made no other lifetime transfers, calculate the IHT payable on the
transfer.Chargeable amount: £444,000
Taxable amount: £119,000
Lifetime tax @ 20%: £23,8002. Calculating the gross chargeable transfer (GCT) carried forward.
In this example the trustees are paying the tax at a rate of 20% and the GCT is therefore £444,000.
If, on the other hand, the donor – Ronald had agreed to pay the IHT then his estate would have
diminished, or reduced by both the gift and the tax.Taxable amount £119,000
Lifetime tax @25% £29,750
Gross chargeable amount to carry forward £148,750”The ‘gross chargeable transfer’ is the TOTAL loss to the donor (after exemptions), i.e. how much is the donor ‘out of pocket’ (worse off) by making the gift. So if the donor pays the tax, then the donor is out of pocket by both the gift AND the tax. In this case, the amount chargeable (after the nil rate band) is treated as being net of tax at 20%, so the amount is 80% of the gross and the tax is calculated as 20/80 (or 25%).
So if the trustees pay the tax, the donor is out of pocket by the gift alone; so in the example given, the gift (after exemptions) is £444,000, the tax would be at 25% so £(444,000 – 325,000) + £23,800 and the gross chargeable transfer (loss to the donor (after exemptions)) would be £444,000.
If the donor pays the tax, the donor is out of pocket by the gift (after exemptions) of £444,000 plus the tax of £(444,000 – 325,000) x 25% = £29,750, meaning that the gross chargeable transfer is
£(444,000 + 29,750) = £473,750.Dear tutor,
so, it means that in the case of donor, the Gross chargeable amount to carry forward should be £473,750, instead of £148,750 as per the Note?
Yes, the gross chargeable transfer is the TOTAL loss to the donor (after exemptions) so if the donor pays the tax, then the donor is out of pocket by both the gift AND the tax and in this scenario that would be £473,750.
What you did originally (which is a common mistake), is add the tax to the taxable amount after the NRB of £119,000 which is incorrect.
It’s so common that the tutor (not me!) who updated the notes for FA2023 made the same mistake in Illustration 3!
- You must be logged in to reply to this topic.