Inheritance tax payable

Inheritance tax payable

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The estate is valued at 400,000 including PETS made within 7 years of the death. No spouse past or present. The beneficiaries of the PETS are not included in the will.

The Lifetime gifts reduce the nil-rate band first.

Question - who pays the tax bill?

I thought that as the lifetime gifts reduced the nil-rate band first, that meant they were exempt of tax (being less than the nil-rate band) but I now think this is not the case and if it isnt, how is the tax paid and by whom?
Anon

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By User deleted
19th Nov 2008 11:10

Thanks Pip
Yes that helps.

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By User deleted
18th Nov 2008 16:52

Example
Say you have the following situation

01/01/2003 Gift to A £200,000

01/01/2004 Gift to B £200,000

01/11/2008 Death - estate valued at £500,000

Gift to A would use up £200,000 of the NRB of £312,000 - result no tax due

Gift to B would use up balance of NRB - £112,000 and the balance would be chargeable to tax at 40% - tax due of £35,200 (but note IHT taper relief also due but ignored for purposes of this example). Tax payable by B

Estate - no NRB available to use so total £500,000 taxable at 40% = £200,000 payable by executors.

Hope this helps.
Pip

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By User deleted
17th Nov 2008 17:05

Thanks Andrew
I'm not really sure of the answer though. Are you confirming that the fact that the lifetime gifts reduce the nil-rate band first, does not mean they are exempt from tax if they total more than the nil-rate band?

Would the tax be paid by the estate/trustees or would the recipients of the PETS have to find the tax?

If the recipients have to find the tax then how is this apportioned?

Sorry to be a pain - the penny will click eventually.

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By andymeeson
17th Nov 2008 14:24

Question of timing
The PETs were initially presumed to be exempt, and so by definition were made gross. As a result, should any tax be due as a result of death within the 7 years following a PET, the tax will be payable by the donee.

As far as using up the NRB is concerned, the general principle is that chargeable transfers consume NRB in chronological order. The PETs become chargeable transfers made at the date of the original gift, and so any failed PET will use up nil-rate band in preference to the death estate. So, if all the failed PETs are within the NRB, all death-rate tax falls upon the estate. Only if the cumulative failed PETs exceed the NRB will there be tax payable by the donees.

What may be confusing you is the position when the death estate is split between personal and settled property - in such cases, an "estate rate" is established (total tax charged divided by total estate), and applied to each individual element of the total estate, with trustees bearing the tax for their settlements and the LPRs bearing the tax on the personal estate.

NB don't forget that being covered by the nil-rate band is NOT the same as being exempt or exempted.

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