IHT Lifetime tranfers

What two IHT calculations may be required for a lifetime chargeable transfer (LCT)?

IHT payable immediately on the transfer and additional IHT if the donor dies within seven years.

What happens to a potentially exempt transfer (PET) if the donor dies within seven years?

It becomes chargeable to IHT and must be assessed using the death-date rules.

How is the cumulative total calculated for a lifetime transfer?

Add chargeable transfers made in the seven years preceding that transfer.

Why may an IHT calculation following death require looking back up to 14 years?

An earlier LCT may affect the nil-rate band available to a later PET that fails on death.

How does an LCT made 10 years before death affect a PET made six years before death?

The LCT forms part of the PET's cumulative total because it occurred within seven years before the PET.

What constitutes a transfer of value under s 3(1) IHTA 1984?

A disposition resulting in an immediate reduction in the value of the donor's estate.

How is the value transferred calculated for IHT?

By reference to the loss in value of the donor's estate, rather than necessarily the value received.

How is a transfer at an undervalue treated for IHT?

The difference between the value given and consideration received is treated as a gift.

How is paying another person's debt treated for IHT?

It may constitute a transfer of value equal to the reduction in the payer's estate.

How are gifts of items forming part of a valuable collection assessed?

By the reduction in the donor's estate value, which may exceed the item's standalone value.

What is the order of calculation for IHT on a lifetime transfer?

Calculate cumulative total, value transferred, exemptions, available NRB and tax; then any taper relief and lifetime tax credit.

What is the standard IHT nil-rate band (NRB) in the notes?

£325,000.

Which NRB applies when an LCT is initially made?

The NRB in force at the date of the transfer.

Which NRB applies when reassessing an LCT or failed PET following death?

The NRB in force at the date of death.

How is the available NRB calculated for a lifetime transfer?

Deduct the cumulative total of earlier chargeable transfers from the NRB.

What is the lifetime IHT rate on an immediately chargeable transfer?

20%, subject to the applicable calculation.

What IHT rate applies to failed PETs and reassessed LCTs following death?

40%, before any applicable taper relief.

How are lifetime transfers ordered when allocating the NRB?

Chronologically, with earlier chargeable transfers using the NRB first.

How do lifetime transfers affect the NRB available to the death estate?

Chargeable transfers within seven years before death use the NRB before the death estate.

How does the residence nil-rate band apply to lifetime transfers?

It does not apply to lifetime transfers.

How much IHT is payable after taper relief for a transfer made within three years of death?

100% of the calculated tax.

How much IHT is payable after taper relief for a transfer made three to four years before death?

80% of the calculated tax.

How much IHT is payable after taper relief for a transfer made four to five years before death?

60% of the calculated tax.

How much IHT is payable after taper relief for a transfer made five to six years before death?

40% of the calculated tax.

How much IHT is payable after taper relief for a transfer made six to seven years before death?

20% of the calculated tax.

What does taper relief reduce?

The IHT payable on the lifetime transfer, not the value transferred.

When does taper relief provide no practical benefit despite the donor dying three to seven years after a gift?

When no IHT is payable on the gift because it falls within the available NRB.

How is IHT previously paid on an LCT treated when the donor dies within seven years?

It is credited against the recalculated tax after taper relief.

What happens if lifetime IHT already paid exceeds the reassessed IHT liability?

No refund is available.

Who is primarily liable for IHT on an LCT during the donor's lifetime?

The donor, with liability potentially passing to trustees if unpaid.

How is IHT on an LCT commonly funded in practice?

From the trust fund.

What is grossing up in an IHT calculation?

Increasing the taxable transfer to reflect IHT paid by the donor in addition to the intended gift.

Why is grossing up required when a donor pays IHT on an LCT?

The tax payment itself increases the total loss to the donor's estate.

Who is generally liable for additional IHT on a failed PET after death?

The donee.

Who is generally liable for additional IHT on an LCT settled into trust after death?

The trustees.

When may personal representatives become liable for IHT on lifetime transfers?

If the donees or trustees fail to pay.

Who is liable for IHT attributable to the free estate on death?

The personal representatives.

How is IHT on the free estate normally funded?

From the residuary estate as a testamentary and administration expense.

What is the effect of s 211 IHTA 1984 on gifts made by will?

Gifts are generally treated as free of IHT, with tax borne by residue unless the will provides otherwise.

How may a will alter the burden of IHT?

By expressly directing particular gifts or beneficiaries to bear specified tax.

What is the effect of a contrary tax provision in a will on the overall IHT liability?

It reallocates the burden but does not reduce the total tax due.

Who normally bears IHT attributable to assets passing outside the free estate?

The beneficiary receiving the asset.

What is the annual IHT exemption under s 19 IHTA 1984?

£3,000 per tax year.

In what order is the annual exemption applied to lifetime gifts?

Chronologically, after other available exemptions and reliefs.

How is the annual exemption allocated between gifts made on the same day?

Proportionately between the transfers.

How much unused annual exemption can be carried forward?

Unused exemption from the immediately preceding tax year only.

What is the maximum annual exemption available in one tax year including carry-forward?

£6,000.

In what order are current and carried-forward annual exemptions used?

Current year's exemption first, then unused exemption from the preceding year.

What types of payments to a spouse or former spouse may qualify for the family maintenance exemption?

Qualifying maintenance payments, including those made under divorce arrangements.

What payments for children may qualify for the family maintenance exemption?

Maintenance, education or training while the child is a minor or in full-time education or training.

When may maintenance payments for a child who is not the donor's legal child be exempt?

Where the child was in the donor's care for substantial periods while under 18 and meets the age or education conditions.

Which relatives may qualify for the dependent relative maintenance exemption?

Qualifying parents and relatives unable to maintain themselves because of old age or infirmity.

What is the small gifts exemption under s 20 IHTA 1984?

Gifts totalling no more than £250 per recipient per tax year.

What happens if gifts to one recipient exceed £250 in a tax year?

The small gifts exemption is unavailable for that recipient.

How many recipients may benefit from the small gifts exemption?

There is no limit on the number of qualifying recipients.

How does the small gifts exemption interact with the annual exemption?

Both cannot be applied to gifts to the same recipient in the same tax year.

What marriage gift exemption applies to a gift made by a parent?

£5,000 per donor.

What marriage gift exemption applies to a gift made by a grandparent or remoter ancestor?

£2,500 per donor.

What marriage gift exemption applies to a gift made by one party to the marriage to the other?

£2,500.

What marriage gift exemption applies to gifts from other donors?

£1,000 per donor.

When must a gift be made to qualify for the marriage exemption?

Before and conditional on marriage, at the marriage, or afterwards to satisfy a prior legal obligation.

How does the marriage exemption interact with the annual exemption?

Both may apply to the same gift.

What three conditions must be satisfied for the normal expenditure out of income exemption?

Gifts come from income, form a normal pattern and do not reduce the donor's standard of living.

What monetary limit applies to the normal expenditure out of income exemption?

No fixed upper limit.

What is the solicitor's duty under CCS 3.1 when taking will instructions?

Take instructions from the client or a properly authorised person and ensure they reflect the testator's wishes.

What professional conduct risk arises where relatives dominate will instructions?

Undue influence or instructions that do not reflect the testator's intentions.

What does CCS 3.2 require when preparing wills?

Competent and timely service, including prompt drafting.

What does CCS 3.3 require of a solicitor advising on wills?

Maintaining competence in relevant matters, including trusts and tax.

What does CCS 3.4 require when advising a testator?

Considering the client's circumstances and assessing testamentary capacity.

What is the golden rule when testamentary capacity is in doubt?

Seek the testator's consent for medical assessment and confirmation of capacity.

What should a solicitor explain to a doctor assessing testamentary capacity?

The relevant legal test for testamentary capacity.

What should a solicitor do if testamentary capacity cannot be confirmed?

Avoid preparing an ordinary will and consider a statutory will through the Court of Protection.

What provision permits the Court of Protection to authorise a statutory will?

Section 16 Mental Capacity Act 2005.

What records should a solicitor retain concerning testamentary capacity?

Detailed attendance notes and an express assessment of capacity.

What principle is illustrated by Hawes v Burgess [2013]?

Strong evidence is needed to displace an experienced solicitor's contemporaneous assessment of capacity.

What conflict risk arises when a solicitor or their family receives a significant gift under a will?

An own-interest conflict under CCS 6.1.

What should a solicitor consider where a client proposes a significant gift to the solicitor or their family?

Declining to act unless the client obtains independent legal advice.

How is the significance of a testamentary gift to a solicitor assessed?

By its absolute value and its value relative to the estate.

What is the significance of a will drafter also being a beneficiary?

Knowledge and approval of the will is not presumed.

What principle was established in White v Jones?

A solicitor may owe intended beneficiaries a duty of care for negligent delay in drafting a will.

What principle is illustrated by Ross v Caunters?

A solicitor may be liable for failing to warn that witnessing by a beneficiary's spouse invalidates the gift.

Which statutory provision invalidates gifts to attesting witnesses or their spouses?

Section 15 Wills Act 1837.

What principle is illustrated by Esterhuizen v Allied Dunbar Assurance?

Leaving a will for the testator to arrange execution without sufficient assistance may be negligent.

What information should be obtained when taking will instructions?

Personal circumstances, assets, family relationships, intended beneficiaries and testamentary wishes.

Why should solicitors consider the Inheritance (Provision for Family and Dependants) Act 1975?

Eligible family members or dependants may claim reasonable financial provision from the estate.

What should a solicitor do when a testator wishes to exclude a potential 1975 Act claimant?

Obtain and retain the testator's written reasons and explain that a claim cannot be ruled out.

What should be checked concerning former spouses or civil partners and potential 1975 Act claims?

Whether a financial order includes a statutory bar on an application.

What principle is illustrated by Ilott v The Blue Cross [2017]?

An estranged adult child may succeed in a 1975 Act claim despite express disinheritance.

What major life events should prompt a review of an existing will?

Marriage, divorce, children, deaths, major asset changes, moving abroad or acquiring foreign assets.