INHERITANCE TAX

By contrast, for capital gains tax purposes the valuation will be based on the market value of the shares gifted, which is £120,000.

As far as Paper F6 (UK) is concerned, a transfer of value will always be a gift of assets. A gift made during a person’s lifetime may be either potentially exempt or chargeable.

Potentially exempt transfers Any transfer that is made to another individual is a potentially exempt transfer (PET). A PET only becomes chargeable if the donor dies within seven years of making the gift. If the donor survives for seven years then the PET becomes exempt and can be completely ignored. Hence, such a transfer has the potential to be exempt.

If the donor dies within seven years of making a PET then it becomes chargeable. Tax will be charged according to the rates and allowances applicable to the tax year in which the donor dies. However, the value of a PET is fixed at the time that the gift is made.

Example 2

Sophie died on 23 January 2013. She had made the following lifetime gifts:

·           8 November 2005 – A gift of £450,000 to her son.

·           12 August 2010 – A gift of a house valued at £610,000 to her daughter. By 23 January 2013 the value of the house had increased to £655,000.

The gift to Sophie’s son on 8 November 2005 is a PET for £450,000. As it was made more than seven years before the date of Sophie’s death it is exempt from IHT.

The gift to Sophie’s daughter on 12 August 2010 is a PET for £610,000 and is initially ignored. It becomes chargeable as a result of Sophie dying within seven years of making the gift, and the transfer of £610,000 will be charged to IHT based on the rates and allowances for 2012–13.

Chargeable lifetime transfers

Any transfer that is made to a trust is a chargeable lifetime transfer (CLT).

There is no legal definition of what a trust is, but essentially a trust arises where a person transfers assets to people (the trustees) to hold for the benefit of other people (the beneficiaries). For example, parents may not want to make an outright gift of assets to their young children. Instead, assets can be put into a trust with the trust being controlled by trustees until the children are older.

Unlike a PET, a CLT is immediately charged to IHT based on the rates and allowances applicable to the tax year in which the CLT is made. An additional tax liability may then arise if the donor dies within seven years of making the gift. Just as for a PET, the value of a CLT is fixed at the time that the gift is made, but the additional tax liability is calculated using the rates and allowances applicable to the tax year in which the donor dies.

Example 3

Lim died on 4 December 2012. She had made the following lifetime gifts:

·           2 November 2005 – A gift of £420,000 to a trust.

·           21 August 2010 – A gift of a house valued at £615,000 to a trust. By 4 December 2012 the value of the house had increased to £650,000.

The gift to the trust on 2 November 2005 is a CLT for £420,000, and will be immediately charged to IHT based on the rates and allowances for 2005–06. There will be no additional tax liability as the gift was made more than seven years before the date of Lim’s death.

The gift to the trust on 21 August 2010 is a CLT for £615,000, and will be immediately charged to IHT based on the rates and allowances for 2010–11. Lim has died within seven years of making the gift so an additional tax liability may arise based on the rates and allowances for 2012–13.

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