PET or CLT?

[Aldous]

Hello all

I'm struggling to work out whether a grandparent's payment of course fees (approx. £20k) to a company amounts to a Potentially Exempt Transfer or a Chargeable Lifetime Transfer.

As far as I can tell, it's not a Potentially Exempt Transfer as the payment is not to an individual and it does not increase the size of the transferee's /donee's estate. As such it's an immediately Chargeable Lifetime Transfer and the IHT burden falls back on the estate (i.e. not the person who benefitted from the course).

Is this assessment correct or have I made some horrendous error somewhere?

A.

p.s. Assume the value of the estate of the grandparent is over the NRB and ignore taper relief, etc. etc.

[pqtaxation]

It’s not clear why grandparents are to make payment to company. How will company (closed and private presumably) account for payment from grandparents?

Payment by company’s of tuition fees usually may raise tax issues over benefit in kind and it
could be that other approaches are suited to the circumstances -- such as grandparents gifting (as PET) tuition fees to grandchild over a period of time and possibly the payments benefitting from exemptions (e.g. £3000 per year per grandparent or normal expenditure out of income – see other thread today at http://www.taxationweb.co.uk/forum/monthly-gift-payments-t36330.html)

[Aldous]

pqtaxation

Thanks for the reply.

You said "it's not clear why grandparents are to make payment to company". To clarify, the grandparents paid the company because that was/is the/a course provider, i.e. the grandparents paid the course fees. The grandparents have since passed away so the concern is does a liability arise and if so, who ought to bear the burden of that liability.

The link you posted was to an Income Tax thread?

[maths]

The answer depends upon the structuring.

If the grandparent simply contracts with the school to pay for the education of the grandchildren this would constitute a chargeable lifetime transfer (CLT) and not a PET. This is because no property becomes comprised in the estate of the child nor does the child's estate increase in value (s3A(2)).

If the parents contract with the school and the grandparent discharges the parent's indebtedness to the school the grandparent has made a PET (parent's estate is increased due to no requirement to discharge the liability incurred).

[Aldous]

Maths,

Thanks a lot for your post.

That's what I thought because of your previous message about school fees.

In this case, I'm fairly certain the transaction was structured as a CLT because the payments were from the grandparent to the course provider.

Am I right in thinking that the incidence/burden of taxation in CLT's (unlike PET's) is on the transferor, in this case the estate, rather than the transferee, i.e. me????

[pqtaxation]

Am I right in thinking that the incidence/burden of taxation in CLT's (unlike PET's) is on the transferor, in this case the estate, rather than the transferee, i.e. me????

HMRC's view is that liability is transferor's and, if not paid, transferee's as in IHT manual 30062:

http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM30062.htm

Sorry for not understanding OP, I had understood that a transfer was in planning to a company controlled by grandparents.

[Aldous]

PQTaxation

"HMRC's view is that liability is transferor's and, if not paid, transferee's as in IHT manual 30062"

Right - understanding that sentence is easy , understanding it's implications is less so

My reading of what that means is that my grandparent would have been liable for the duration of her life and then, on death, I would be liable, as the transferee, for any IHT liability.

However, that seems bizarre given that it was the grandparent's gift so surely the additional tax burden should fall on the estate + I was never given any money to pay the IHT so effectively I'm out of pocket. I understand I shouldn't complain too much as I was still given a generous gift but I suppose it's the tax system that I'm railing against...

Lol - don't worry about it. I'm just thankful for your advice PQTaxation!

[pqtaxation]

My reading of what that means is that my grandparent would have been liable for the duration of her life and then, on death, I would be liable, as the transferee, for any IHT liability.

My reading is that estate takes on testator's (contingent) liability but have you made contact with executor of your grandparents' estates in this case?

[maths]

Am I right in thinking that the incidence/burden of taxation in CLT's (unlike PET's) is on the transferor, in this case the estate, rather than the transferee, i.e. me????

My reading of what that means is that my grandparent would have been liable for the duration of her life and then, on death, I would be liable, as the transferee, for any IHT liability.

There appears to be some confusion.

Assuming a CLT then the primary liability which arises at the date of the gift is that of the donor. As a consequence, any gift in principle needs to be "grossed-up" and the grossed amount subject to IHT at 20%.

Grossing up is only necessary if at the date of the gift the individual's nil rate band has been fully utilised.

The donor and donee can agree at the time of the gift that the donee is liable in which case no grossing up is involved.

An "additional" IHT charge arises (at 40%) only if the donor dies within 7 years of the date of the original gift; thus, death thereafter gives rise to no additional IHT charge.

Should an additional IHT charge arise it is the donee's liability but any IHT charge which arises on the original lifetime CLT is offsettable against the charge (and taper relief may apply).

[Aldous]

PQTaxation and Maths

Thank you very much. Your responses are all very helpful.

PQTaxation - I haven't got in touch with the executors but I want to investigate things independently. Obviously, there are annual exemptions, income out of normal expenditure exemptions and the nill rate band which may come in to play later but the issue that I'm trying to clarify (i.e. whether I will owe any money because a grandparent paid for a course of mine a few years ago) I think is an isolated one.

Maths

At the end of your post you said "Should an additional IHT charge arise it is the donee's liability but any IHT charge which arises on the original lifetime CLT is offsettable against the charge (and taper relief may apply)".



I must admit, I'm more than a bit baffled. That seems to imply that I'm liable and so I will owe the estate money (if none of the exemptions/ thresholds apply). That seems absurdly unfair because it can hardly have been the donor's intention...