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as per the tax tables for tax yr 24-25, the lifetime rate is 20% and death rate is 40%. then from where does 25% charge on transferor come into picture? even acca study hub has mentioned this 20/80 rule nd 25% tax rate when donor is paying. can u clarify this 20% and 25% rates confusion
The lifetime rate of IHT is 20% on any part of the transfer into a trust which is in excess of the available nil rate band (NRB). If the trustees are paying the tax, then it’s just 20% of the excess. If the donor is paying the tax (and if the question is silent you assume that the donor is going to pay), then the excess over the NRB is treated as being net of 20% tax, which is 80%. Therefore if you divide by 80 and multiply by 20 (20/80) the resulting figure is the tax. 20/80 is the same as 25%. I hope this clears it up for you.
yes this was very clear thank u . but suppose the qtn says value of transfer is 400000 how much iht is paid on this clt? then how do we calculate? shld we do 400000-3000(being ae) -325000(being nrb)=72000 so donor pays 25% on this 72000? so iht paid will be 18000?
That’s correct, but check if last years’ AE is available as you could be deducting a total of £6,000 for AEs rather than £3,000. The tax paid by the donor is added in to the net CLT to find the gross CLT (gross chargeable transfer) so going off your figures that would be:
Net CLT (after AE) = £397,000
Tax paid by donor = £18,000
Gross CLT = £415,000We add the tax in when the donor has paid as we need the total loss to the donor, which includes the tax. This gross chargeable transfer of £415,000 will then reduce the NRB for the next 7 years.
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