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Order of gifting for IHT purposes

PET then CLT or vice versa?

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Hi

I have a client who made a PET 4 years ago above the NR band. They are now considering establishing a trust. I am already aware they can use the full nil rate band when calculating if any lifetime IHT is due, as you only need to look at chargeable transfers made in the last 7 years, and PETs arent chargeable transfers. However what would be the position if they die within the next three years? Would the NRB on death be used first against the PETs (but taper relief due on the amount of tax charged) meaning none would be available against the CLT so IHT at 40% would be due on the whole amount transferred to trust?

I have read that the 7 year clock is effectively reset on PETs within the last seven years when a CLT is made - does this mean the client has to survive 7 years from the date of the CLT for no IHT to be due on them? 

Thanks in advance

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By Tax Dragon
09th May 2019 14:04

A gift made less than seven years before death is a chargeable transfer. So, yes, IHT on the transfer to trust. In your scenario, that transfer is less than three year before death, so the tax rate would be 40%, as you say.

alisonis wrote:

I have read that the 7 year clock is effectively reset on PETs within the last seven years when a CLT is made - does this mean the client has to survive 7 years from the date of the CLT for no IHT to be due on them?

No. It means you need to get a better reference work. Or take on a tax partner.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
09th May 2019 15:41

You are perhaps confusing this with the consequences of making a CLT and then a PET, followed by death. If death occurs within 7 years of making the PET, chargeable transfers within the 7 years prior to the PET need to be taken into account - so potentially a 14-year period, rather than 7, to consider.

Sorry - that was intended to be a response to the questioner.

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By alisonis
09th May 2019 14:13

Thankyou, I agree and re the article I read this was on a tax planning site!

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By Tax Dragon
09th May 2019 14:50

My advice: don't rely on tax planning sites for an understanding of basic tax rules.

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