IHTM14577 - Lifetime transfers: the charge to tax: additional charges: the additional tax payable (example 1)

Margaret made three lifetime transfers in excess of the annual exemption:

Jan 2009 = £250,000 to a discretionary trust

Dec 2009 = £120,000 to her son as a potentially exempt transfer (PET)

July 2010 = £200,000 to discretionary trust

Margaret died on 1 November 2012.

No tax was payable on the Jan 2009 transfer because it was below the nil rate band.

No tax was payable on the Dec 2009 PET when it was made.

Lifetime tax on the July 2010 chargeable transfer

Tax immediately payable on the transfer was:

Previous lifetime total (the PET is omitted) = £250,000

July 2010 + £200,000

Value now chargeable = £450,000

Less nil rate band at date of transfer - £325,000

Total = £125,000

Tax at 20% (half death rate) on £125,000 = £25,000

Total tax due = £25,000

Tax on the PET

Margaret’s death in Nov 2012 makes the PET chargeable.

The tax calculation is:

Previous lifetime total = £250,000

PET = £120,000

Value now chargeable = £370,000

Less IHT nil rate band at date of death - £325,000

Total = £45,000

Tax at 40% on £45,000 = £18,000

Additional tax on the July 2010 transfer payable on death within 7 years

On Margaret’s death, you recalculate the tax on the transfer:

Previous lifetime total (now includes the PET) = £370,000

July 2010 + £200,000

Value now chargeable = £570,000

Less IHT nil rate band at date of death - £325,000

Total = £245,000

Tax at 40% on £245,000 = £98,000

(Less tax at 40% on £370,000) - £18,000

(Less tax previously paid on the July 2010 transfer) - £25,000

Total tax payable on the July 2010 transfer on Margaret’s death = £55,000