PET Taper Relief. What's the point?

[MarkyW]

Am I right in believing there is no gain from taper relief for a failed PET unless the value of the gift itself is greater than the NRB?

I am led to understand that a gift will use up the available NRB first so in many instances will be tax free. Because there is no IHT liability, there is no need or requirement to apply taper relief on the gift. The result in reality though is that because of the reduced remaining NRB, more of the remainder of the estate is exposed to IHT. So where an estate is greater than the remaining NRB, we are effectively still paying 40% IHT on the value of a gift that could have been made 6yrs 11 months before DOD. If the gift had been made 7 yrs before DOD then there would be no tax to pay.

So in what instance may taper relief actually be useful?

[maths]

Taper relief reduces the IHT chargeable on a failed PET; it does not reduce the quantum of the gift itself.

TR aplies where the gift is made more than 3 years before death.

If a lifetime gift falls within the nil rate band then taper relief has no effect.

However, if some or all of the NRB has been used then TR may be of value:

EG Tom gifts 100k to bob; then 225k to harry; followed by 50k to karen (4 years before death) and 60k to susan (5 years before death). Tom dies. All the gifts were made between 4 and 7 years before his death.
Bob's gift: no iht charge.
harry's gift: no iht charge
karen's gift: 40% x 50k x 80% (TR)
susan's gift: 40% x 60k x 60% (TR)

[MarkyW]

Thanks for the response and I see the point your making, but I am afraid the scenario is flawed. The oldest gift uses the NRB first.

Susan's gift: no IHT charge (5 years)
Karen's gift: no IHT charge (4 years)
Harry's gift: no IHT charge on 215k (remainder of NRB)
32% (TR) IHT x remaining 15k (3 years)
Bob's gift: 40% IHT x 100k ( No TR gifted 2 years)

Remainder of estate x 40% IHT

Based on that scenario, the estate is £1200 better of than it would have been had Tom not given any gifts during his lifetime.

Also, Fred's a bit cheesed off, because as the sole beneficiary to the remainder of the estate, he is having 40% of Susan's 5 year old gift taken from his inheritance.

But hey ho!

[maths]

I see the point your making, but I am afraid the scenario is flawed

The scenario is not flawed and I was not trying to make a point but simply explain how TR works. However, on re-reading my post I see it lacks a bit of clarity.

EG Tom dies having gifted in his lifetime 100k to bob (6 years before death); then 225k to harry (5.5 years before death); followed by 50k to karen (5 years before death) and 60k to susan (4 years before death). NRB 325k.

Bob's gift: no iht charge
harry's gift: no iht charge
karen's gift: 40% x 50k x 80% (TR) = 16k
susan's gift: 40% x 60k x 60% (TR) = 14,400

TOTAL IHT 30,400.

Had Tom made no lifetime gifts IHT would have been 40% x [435k - 325k] = 44,000.

The aggregate IHT charge on a testator's estate on death will always be at least as great (typically greater) if no lifetime gifts had been made prior to death.

It is, of course, true that to the extent lifetime gifts absorb some part of the NRB then the IHT on the death estate will be greater and the residuary beneficiary's entitlement reduced.

[lizgreen333]

Could I elaborate on this a little as I need some clarification.

I too had somewhat laboured under the misapprehension that taper relief applied to gifts, even if they had not collectively exceeded the available NRB.
I see now I was mistaken.
Does this also apply to a CLT (a transfer that was made into a discretionary trust during the deceased's lifetime)?

Here is my position.
In June 2011 mother (settlor) placed £325K into a discretionary trust (in the form of an onshore bond, kind of investment).
And hoped to live 7 years more so that this sum would fall outside her estate.

Then :

In the 2013/14 tax year she gave away 60K
In the 2014/15 tax year she gave away 15K
In the 2015/16 tax year she gave away 17K
In the 2016/17 tax year she gave away 108K


(these are all over and above her annual IHT free entitlements, like 3K and £250 etc.)

So, Total gifts made in this period = £200K in addition to the CLT of £325k into the trust in 2011.

She died last month, 6 years and 3 months short of the 7 year mark since gifting into the trust.

The NRB due to her estate is 325 + 305 (of my father-also now dead) = 630

(I knowthe estate can also benefit from RNRB and TRNRB but I'm leaving those out of this equation, for simplicity, as form IHT400 actually sets them apart a little, and the end result is the same )

So my question is, to calculate how much of the £630k NRB is "used up" - do I add 325K to 200K = 525K ?

Leaving me only 630-525= 105K of NRB left to set against the remaining assets in the estate?


If so, it would seem that the whole purpose of the CLT has become null and void, since the 7 year mark was not reached.

If the 325k does not enjoy any tapering "calculation" either, it seems for the sake of a few months all this IHT planning came to nought.

Have I understood this correctly?

thanks for any advice

[lizgreen333]

Sorry for my typo,
I meant to put
"died 9 months short of the 7 year point!"
ie. 6 years 3 months after making the transfer.

Sorry.