Multiple Chargeable Transfers

[kbrooks]

I am having trouble calculating the tax charge on multiple distributions from a trust. The distributions were made when different nil rate bands were applicable so that complicates matters. To give a simplified example:

A trust makes a chargable transfer of 450,000 in 2007 when the nil rate band is 300,000. Tax of 20%is therefore paid on 150,000 = 30,000. In 2010 a further transfer of 25,000 was made to take into account the new nil rate band. My question is what figure is the tax charged on. Is it simply the 25,000? Or is it (25,000 + 450,000) - 325,000?

As far as I can tell s7 of the IHTA supports the latter. It reads as follows:
"7(1) Subject to subsections (2), (4) and (5) below] the tax charged on the VALUE TRANSFERRED (my emphasis) by a chargeable transfer made by any transferor shall be charged at the following rate or rates, that is to say—.
(a)if the transfer is the first chargeable transfer made by that transferor in the period of seven years ending with the date of the transfer, at the rate or rates applicable to that value under the . . . Table in Schedule 1 to this Act;
(b)in any other case, at the rate or rates applicable under that Table to such part of the aggregate of—.
(i)that value (THE VALUE TRANSFERRED), and (ii)the values transferred by previous chargeable transfers made by him in that period, as is the highest part of that aggregate and is equal to that value (THE VALUE TRANSFERRED)."

It seems to me that if the aggregate takes the total above £325000, tax is charged on the highest part of the aggregate which is equal to the VALUE TRANSFERRED. This seems to mean that if the earlier transfer was £324000 and the new transfer is £2000, tax is charged on £2000 not £1000.

The problem is that this defies common sense as it would result in a tax charge of 30,000 when there has already been a tax charge in 2007 on part of the same sum. What do the words "and is equal to that value" mean in this section?

Can anyone shed any light on what happens with multiple chargeable transfers?

[pqtaxation]

Nobody else has replied to your post so I’ll give you my thoughts even though I have not previously dealt with HMRC on multiple chargeable transfers.

HMRC’s interpretation of IHTA 1984 s71(b) is given in IHTM 14533 viewable at
http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM14533.htm

Their term is cumulation of chargeable transfers.

They use the £25,000 at 20% approach given in the early question in your post.

In your second to last paragraph example, the HMRC interpretation of applying the current (increased) NRB to earlier chargeable transfers – that is if the first early transfer of £324k was made at a time when the NRB was £310 resulting in a charge of £2.8k = 20% of (324-310) then on a second transfer of 2 now the charge at 20% is on 1 (324+2-325). Hence 0.2 on this transfer plus 2.8 previously makes a total of 3.0 actually paid.

I’m not clear about your 30,000 figure for a tax charge in your penultimate paragraph – how is that figure calculated?

I agree with you that reading the words in the act to understand their meaning is mentally painful --- but sadly that applies to so much of tax legislation!!

[maths]

Are you talking about transfers into trust by an individual or appointments out of trust to a beneficiary?

If the former, the rate on a chargeable lifetime transfer into trust is 20%.

If the latter, the maximum rate is 5.85%.

You appear to be confusing the rates?

[pqtaxation]

Well spotted maths. I just saw the 20% rate in kbrooks‘ post and not the reference to a disposition from a relevant property trust IHTA 1984 s65 1(b)-- kbrooks’ to clarify.