Where Taxpayers and Advisers Meet
Inheritance Tax - Take Care when Making Lifetime Gifts
03/12/2011, by Malcolm Finney, Tax Articles - Inheritance Tax, IHT, Trusts & Estates, Capital Taxes
Rating: 0/5 from 0 people

Donors need to be aware of an important principle when calculating Inheritance Tax on lifetime gifts, explains Malcolm Finney, author of 'Personal Tax Planning: Principles and Practice'.


The Inheritance Tax (IHT) liability (not the additional IHT liability) arising on a Chargeable Lifetime Transfer (CLT) is primarily that of the donor.

The effect of this liability falling on the part of the donor is to increase the actual amount of the transfer of value made by the donor. The donor is no longer simply transferring, say, £50,000 cash but is also having to discharge any IHT charge thereon with the consequence that the donor’s estate in fact diminishes by the size of the transfer plus the IHT payable. In essence, the transfer is a net transfer; the gross transfer equalling the net transfer plus the accompanying IHT charge.

Example 1

Edward Comings transfers £400,000 into his discretionary trust on 1st June 2010.

This is a Chargeable Lifetime Transfer.

As the donor, Edward has the primary liability to discharge the IHT arising on the transfer. Assuming that Edward has exhausted his Nil Rate Band (NRB) (i.e., £325,000 for the tax year 2010–2011) due to having made other CLTs in the immediate seven prior years, the grossed up amount of his £400,000 transfer is:

[£400,000/0.8] = £500,000

This £500,000 is referred to as the gross transfer and the £400,000 the net transfer.

As there is no available NRB to set against the £500,000 the IHT liability is

20% × £500,000 = £100,000.

Thus, the split of the £500,000 is as follows:

• the discretionary trust receives £400,000; and
• the IHT charge is £100,000.

Edward’s estate diminishes by £500,000 (albeit that £100,000 of it is to pay the IHT charge).

Example 2

Using the facts from Example 1, but assume that the whole of the NRB is available against the transfer into the discretionary trust which occurs, for example, if Edward has not made any earlier CLTs in the previous seven years. Of the £400,000 transfer the first £325,000 is charged at the nil rate giving an IHT liability of nil with the balance of £75,000 chargeable at 20%.

However, as Edward is liable for the IHT charge this amount subject to the 20% rate needs to be grossed up:

The amount which is chargeable at 20% is thus:

[£75,000/0.8] = £93,750

The IHT liability is [0% x £325,000 + 20% × £93,750] = £18,750.

The gross transfer of value is thus £418,750 (i.e., £400,000 + £18,750).


  • the discretionary trust receives £400,000; and
  • the IHT charge is £18,750.

Edward’s estate is diminished by £418,750 (albeit that £18,750 of it is to pay the IHT charge).

Example 3

Toby Brewin transfers £250,000 in November 2010 into his discretionary trust.

He has made no earlier lifetime transfers. The whole of the NRB for 2010–2011 of £325,000 is thus available for offset against the transfer.

The IHT liability on the transfer is nil and no grossing up is necessary.

In this case the gross and net transfers are the same (i.e., £250,000).

A comparison of Examples 1, 2 AND 3 shows the, perhaps not unsurprising, result that the greater the availability of the NRB the smaller the extent of the grossing up and a consequent smaller overall gross transfer. This, in turn, lowers the cost to the donor of effecting the CLT.

In the case of CLTs the parties to the transfer (the individual donor and the trustee donees) may agree that the donee (i.e., the trustees) pays the IHT liability, if any, which arises on the transfer. In this case the donor’s estate will diminish only by the value of the gift and thus no grossing up is necessary.

This produces a lesser cost for the donor but, on the other hand, the donees (e.g., the trustees) are left with less than the amount transferred due to the need for them to discharge the IHT liability out of the transfer.

Example 4

Using the facts in Example 1, if the trustees agree to discharge any IHT charge on the transfer the IHT liability arising is simply:

20% × £400,000 = £80,000

The donor, Edward, gifts £400,000 to the trust out of which the trust discharges £80,000 of IHT leaving the trust with net £320,000.

The above article is based on an extract from 'Personal Tax Planning: Principles and Practice, 2nd Edition', by Malcolm Finney, published by Bloomsbury Professional. For further information and to order the book, please visit (Personal Tax Planning: Principles and Practice, 2nd Edition).

About The Author

Malcolm Finney MSc (Bus Admin) MSc (Org Psych) BSc MCMI C Maths MIMA runs his own training firm, Pythagoras Training, which specialises in tax training for professional firms, banks and other financial intermediaries. He was formerly head of tax at the London law firm Nabarro Nathanson (now Nabarros) and head of international tax at the international accountancy firm, Grant Thornton. He is a prolific writer, and has been a visiting lecturer at the University of Greenwich Business School.

Malcolm Finney is author of "Personal Tax Planning: Principles and Practice, 2nd Edition", now in its second edition and published by Bloomsbury Professional. Further information is available at TaxBookshop.com

(E): malcfinney@aol.com

Back to Tax Articles

Please register or log in to add comments.

There are not comments added


ICPA Chairman Tony Margaritelli on MTD