Terminology explained

Chargeable Lifetime Transfer (CLT)

Chargeable Lifetime Transfers involve gifts made during an individual’s lifetime that are immediately taxable under IHT, particularly transfers into trusts. These transfers may attract a 20% IHT on amounts exceeding the donor’s Nil Rate Band

Holding period

The holding period refers to the minimum time an asset must be retained to qualify for certain tax reliefs. Shares in Business Relief-qualifying companies, must be held for at least two years by the deceased before their death to be eligible for IHT relief.

Nil Rate Band (NRB)

The Nil Rate Band is the threshold up to which no IHT is charged on an individual's estate, set at £325,000 and frozen at this threshold until April 2030. Estates valued up to this amount are taxed at 0% IHT, while the excess is taxed at 40%.

Residence Nil Rate Band (RNRB)

Available since 6 April 2017, the RNRB adds an additional threshold when a primary residence or its sale proceeds are left to direct descendants. It complements the standard NRB but reduces for estates exceeding £2 million and may involve complex calculations for downsized homes or changes in residence. The RNRB is £175,000 per person and remains at this threshold until April 2030.

‍

Scenario background

Sanjay

Anita

‍

Sanjay and Anita are husband and wife who own £200k of potentially-qualifying Business Relief (BR) assets each.

Sanjay acquired his BR assets two years ago, following a health scare, whilst Anita acquired her BR assets a year later.

They have now decided that they no longer need the BR assets, and so intend to gift their BR assets to a family Trust established for the benefit of their children and grandchildren.

Anita is not concerned about the BR status of the gift as she considers herself to be in good health, and expects to comfortably survive seven years from the date of making the gift.

Sanjay and Anita have both used up their available Nil Rate Band.

Scenario 1

• Sanjay dies just months after gifting the assets to the family Trust.
• Anita dies four years later.
• The trustees of the family Trust had decided to sell the BR assets immediately after receiving them, to invest in other asset classes.

‍

Sanjay's Inheritance Tax (IHT) position

Asset:

£200k Assets

Tax Payable:

£80,000

Sanjay’s gift is regarded as a failed CLT. There was no IHT on the initial transfer to the Trust, as Sanjay had held the qualifying BR asset for two years.

However, as Sanjay died within seven years of making the gift, and the trustees had sold the asset by this point, BR will not apply on Sanjay’s death.

‍

Anita's Inheritance Tax (IHT) position

Asset:

£200k Assets

Tax Payable:

£48,000

Anita’s gift is regarded as a failed CLT, therefore is liable to IHT at the tapered rate due to dying after four years of the gift (IHT payable at 24%).

Anita’s assets at the time of transfer did not qualify for BR due to not holding the assets for the required two year period.

Scenario 2

• Sanjay dies of a pre-existing heart condition just months after gifting the assets to the family trust.
• Anita dies 10 years later.
• The trustees of the family Trust retained the BR assets for a couple of years following the transfer, before selling them to invest in other asset classes.

‍

Sanjay's Inheritance Tax (IHT) position

Asset:

£200k Assets

Tax Payable:

Nil

Sanjay’s gift is regarded as a failed CLT. There was no IHT on the initial transfer to the trust, as Sanjay had held the qualifying BR asset for 2 years.

Although Sanjay died within 7 years of making the gift, the trustees had still retained the assets at this point, so full BR applies on Sanjay’s death. There are also no periodic charges in the Trust where BR assets are held.

‍

Anita's Inheritance Tax (IHT) position

Asset:

£200k BR Assets

Tax Payable:

Nil

Anita’s gift is regarded as a successful CLT and therefore fall out of her death estate for IHT purposes.

It therefore did not matter that the assets did not qualify for BR at the time of transfer, as she survived a full seven years from the date of transfer.

Takeaways

The two examples above show how timing and use of BR assets can potentially reduce IHT exposure if the gift becomes a failed CLT.

It should be noted that had either of Sanjay or Anita’s gift to Trust been greater than the available NRB at the time (potentially up to £325,000) and not qualify for BR at the time, the transfer the value in excess of the NRB would have been immediately chargeable to IHT at 20%.

--------

Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Please note: The explanation of the 2024 Autumn budget changes is in accordance with our understanding of the law and our interpretation of it at the time of publication. The proposed reforms we will discuss have not yet been drafted in legislation; and are subject to change.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.