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During a past paper question I got a little confused with the 7 year accumulation rule, so I’ve been back over my notes and I think I’ve got it. I’ve written it here to see if I can articulate it, and for you guys to tell me if I’m right or wrong.
If someone dies today, you look back 7 years; all PETs and CLTs made within this time are now chargeable to IHT along with the death estate. The nil rate band you will be using is that applicable in the year of death.
Any PETs that fall outside the 7 years before death are now fully exempt from IHT, and will also be ignored when calculating how much nil rate band is available.
Any CLTs that fall outside the 7 years before death are also now fully exempt from any further IHT, however, their value does need to be considered when calculating how much nil rate band is available.
So, at the date of death, look back 7 years and find the earliest PET or CLT in that time frame. Then, look back another 7 years from that earliest transfer and reduce the available nil rate band by the value of any CLTs you find in that additional 7 years.
Does that sound right?
You only look back 7yrs at death to the first pet or clt. You don’t look back 7 yrs again. the NLRB is a 7yr cumulative, so you get the NLRB every 7 yrs.
Hope that helps
Nil rate band is once in life time? I dont get what is this twice considering nrb every seven years?
Pretty much right, apart from until the death occurs, the transactions are all PETs pretty much, they become CLTs on death, and the period of 7 years is in place
As said, there is only one 7 year period, the 7 years up to the point of death
PETs are transfers that could/will be charged as part of IHT calc, if they fall under the 7 year rule
Remember taper relief too
When referring to a CLT, I mean a transfer into a trust which will have incurred lifetime tax. All transfers not into trust are either exempt (to a spouse, for example) or potentially exempt, depending on how long the donor lives.
The thrust of what I’m saying is that on death, in addition to the death estate, all PETs and CLTs (i.e. into trusts) made in the 7 years prior to death are now chargeable to IHT. The nil rate band applicable is that in effect in the year of death (i.e. £325,000 in 2013/14).
Then, and this is the crucial bit which seems to be causing the most disagreement:
Any CLTs (again, I mean into a trust) made within the 7 years prior to the earliest PET/CLT made in the 7 years before death, reduces the nil rate band available. This is not the case with any PETs made in that same 7 years prior.
Example A:
Individual dies 6th June 2014. Only ever made a PET in 2005 and another PET in 2010.
The PET in 2005 is now fully exempt as the donor lived in excess of 7 years. The PET in 2010 is now chargeable to death tax along with the death estate as it was within 7 years. Full NRB available (£325,000) and used against PET in 2010 first before death estate, excess at 40% less taper relief.Example B:
Individual dies 6th June 2014. Made a CLT (into a trust) in 2005 and a PET in 2010.
The CLT in 2005 is now fully exempt as the donor lived in excess of 7 years. The PET is now chargeable to death tax along with the death estate as it was within 7 years. The full NRB is not available. Looking back 7 years, not from the death, but from the PET in 2010, there was the CLT in 2005. This CLT reduces the NRB available for the PET in 2010. Again, excess at 40% less taper relief.So what I’m saying is that any transfers prior to the 7 years before death are fully exempt from an IHT charge, but any NRB will be reduced by any CLTs made in the 7 years prior to the earliest transfer that is now chargeable. This is my understanding from BPP. If you check the OT notes for F6 (I so wish they did P6….) on page 151, I believe it is in agreement.
Some of you may appreciate the significance of the date of death in my two examples 🙂
I’ve got an example in Kaplan text, gifts given in 2013 and furthest in 2003. We must go back to 1996 to check if any GCT’s were made, so you’re right.
Thanks kop17. It’s a tricky tax – I think this may panic a few people so close to the exam, but forewarned is forearmed.
This came up in the F6 exam June 2014. It may come up in the P6 too… But i’d suggest watching the recorded lecture on the F6 page (the last lecture on the notes to do with IHT – ‘7 year cumulation period-example 2’). It explains what bogel said, and is correct!
Very interesting though. I quite enjoyed learning about it. It’s actually very straight forward once you’ve watched the lecture. Reading it in the BPP textbook… not so much.
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