TXInheritance tax

dear sir i was solving this question after completing all the questions of kit and the question is also present in dec 2011 past paper of f6 the question is On 15 January 2011 Blu Reddy made a gift of 200,000 £1 ordinary shares in Purple Ltd, an unquoted investment company, to a trust. Blu paid the inheritance tax arising from this gift. Before the transfer Blu owned 300,000 shares out of Purple Ltd’s issued share capital of 500,000 £1 ordinary shares. On 15 January 2011 Purple Ltd’s shares were worth £2 each for a holding of 20%, £3 each for a holding of 40%, and £4 each for a holding of 60%. Blu has not made any previous gifts. Required: Calculate the inheritance tax that will be payable as a result of Blu Reddy’s gift to the trust, and the additional inheritance tax that would be payable if Blu were to die on 31 May 2015. Note: You should ignore annual exemptions, and should assume that the nil rate band for the tax year 2010–11 remains unchanged. and the solutions is Blu Reddy – Inheritance tax computation £ Lifetime transfer 15 January 2011 Value of shares held before the transfer 300,000 x £4 1,200,000 Value of shares held after the transfer 100,000 x £2 (200,000) –––––––––– Net chargeable transfer 1,000,000 IHT liability 325,000 at nil% 0 675,000 x 20/80 168,750 –––––––––– Gross chargeable transfer 1,168,750 –––––––––– Additional liability arising on death 31 May 2015 Gross chargeable transfer 1,168,750 –––––––––– IHT liability 325,000 at nil% 0 843,750 at 40% 337,500 Taper relief reduction – 40% (135,000) –––––––––– 202,500 IHT already paid (168,750) –––––––––– Additional liability 33,750 –––––––––– my question arises after Gross chargeable transfer of 1,168,750 that how he could use the Nil Rate Band of 325000 when he has already made a gift of shares within 7 years of time period in which he died cause in every question that i solved i always practiced and saw that we subtract the previous Gross Chargeable Transfer that falls in 7 years of death then why he did not subtract that from the NRB of the death year? please clear it to me Answer by Max Tutor: There is only ONE lifetime transfer that you are dealing with! The transfer is a transfer into a trust, a Chargeable Lifetime transfer (CLT) and therefore as the question itself clearly stated you need to calculate firstly the amount of tax that was payable in lifetime, using the nil rate band that applied at the date of the transfer and then compute the additional tax payable on the SAME transfer as a result of the death of the taxpayer using the nil rate band at the date of death. As this is the ONLY lifetime transfer it gets to use the nil rate band – this has NOT been used on any earlier transfer! New Question: Could you provide a more detailed answer to this, please? You mean that because of the point in question “You should ignore annual exemptions and should assume that the nil rate band remains unchanged from that for the tax year 2010/11”, they are using a full nil rate band at the date of the death. If so, what if there was no such point in the question, would not be able to use the nil rate band in the calculation?