Question

1. Discuss what is a Chargeable Lifetime Transfer, the tax rates and the Grossing-up rules. (100 words)

Taxation

Answer 1

Chargeable lifetime transfer

Lifetime transfers of value (broadly, gifts) that are immediately chargeable to inheritance tax. Broadly, a lifetime gift is immediately chargeable unless it is an exempt transfer or a potentially exempt transfer (PET) (section 2, Inheritance Tax Act 1984). The rate of tax for lifetime transfers that exceed an individual's nil rate band is 20% (subject to any reliefs).

For example, the following may be chargeable lifetime transfers:

• Gifts to relevant property trusts.

• Gifts to companies.

• Gifts made by close companies.

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A lifetime chargeable transfer will trigger an immediate charge to IHT if it exceeds the NRB (together with any other chargeable transfers in the previous 7 years). The rate of tax is half the death rate – ie 20% – with nothing further to pay if the person lives for the next 7 years.

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The reason we have to gross up is because IHT is based on the loss to the person’s estate. If they make a transfer to the trustees and they pay the tax to the tax man, then the loss to the estate is the two added together, and tax is worked out on that figure.

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Example

Charlie gifts £350,000 into a discretionary trust. He had already used his annual allowances of £3,000 but had made no other gifts.

If the trustees pay the tax on the gift, their liability will be:

£350,000 – £325,000 = £25,000 x 20% = £5,000

If Charlie pays the tax as settlor, then the value has to be grossed up. The easiest way to work this through is by multiplying the net transfer by 1.25 (or divide by 0.8), ie £25,000 x 1.25 = £31,250 and multiplying this by 20% to give £6,250.