Failed PET and reduced rate calculation

Jotiho

If an estate involves a failed PET does the amount by which the total of lifetime transfers exceeds the nil rate band affect the “baseline amount” threshold for reduced IHT on the rest of the estate?

 For example, suppose the total lifetime transfers within the seven years preceding death is £400k and the value of assets in the estate on death is £600k and the residential nil rate band does not apply is the baseline amount £600k or £675k (£600k plus £400k minus £325k)?

 Can the reduced rate ever apply to the amount of the failed PET (in this case £75k)? I assume not, since the tax is (in the first instance) payable by the recipient not the estate.

I have not be able to find any clear guidance on the HMRC documentation of these questions and be grateful for the forum’s thoughts.

GDB2222

I'm not sure of the terminology, and maybe an expert will explain that, but I think I understand the IHT position. 

The £400k lifetime transfers have used up the NRB, and the recipients are liable to pay their IHT on the final £75k of that, subject to any taper relief. The remaining £600k in the estate is all subject to IHT at 40%.

You probably knew that already, but maybe it helps to confirm.

uknick

The IHT due on "failed" PETs, i.e., those less than 7 years old, is usually paid for by the estate, if it has the funds.  In the OPs example it would appear the estate will have the funds.  However, if the gift, or the will itself, included a caveat such as the recipient has to pay any IHT due this would be different matter.

Of course, you then have to sit down and work out which gift recipient has IHT to pay and how much.  This could well be a bun fight unless very clearly documented.

Jotiho

Thanks to both for your input. I think the legal position is that the IHT on a failed PET falls on the recipient(s), but that if this is unpaid after two years, the executors and the recipient become jointly liable. My main question was about the calculation as to whether an estate qualifies for the reduced  rate of IHT (32%). This is applied where the will leaves 10% or more of the “baseline amount” to charity. What I’m not clear about is whether the baseline amount takes account of the amount of the failed PET or not.

Grateful for any thoughts

uknick

Jotiho said:

Thanks to both for your input. I think the legal position is that the IHT on a failed PET falls on the recipient(s), but that if this is unpaid after two years, the executors and the recipient become jointly liable. My main question was about the calculation as to whether an estate qualifies for the reduced  rate of IHT (32%). This is applied where the will leaves 10% or more of the “baseline amount” to charity. What I’m not clear about is whether the baseline amount takes account of the amount of the failed PET or not.

Grateful for any thoughts

Where did you get that idea from?  IHT is the responsibility of the estate; probably buried deep in the legislation somewhere.  It is only if the estate can't pay failed PETs the recipients have to pay it.

If it first fell to the recipients this would make it a gift tax, which is not a tax in the UK.

However, I'm happy to be corrected if you have a link to legislation that indicates your understanding.

uknick

In answer to your question about charity giving, the rate is currently 36% if you leave 10% of your net estate to charity.  The net estate value is the total value of the estate less any debts and permissible deductions such as funeral costs.

PETs less than 7 years will be included in the estate gross value, as they form part of the IHT calculation. 

Jotiho

Thanks uknick.

I'm confused.

 p2 of form IHT403 suggests that the recipient is liable:
"Gifts made within the 7 years before death continued
If Inheritance Tax is due on any of the gifts, the people who received them are liable to pay the tax due on them. This is separate from the Inheritance Tax that may be due on the estate. A year after the date of death, the executors or administrators of the deceased’s estate become jointly liable for the tax on the gifts"

But this

accountingweb DOT co DOT uk/any-answers/iht-on-failed-pets [I can't post links]

seems to imply the estate can pay, and that it may turn on the wording of any Deed of gift or of the will.

Either way, the issues of how taper relief (if it applies) is handled, and how the "baseline amount" is affected (or not) by the value of the failed PET remain.

For example, if you simply add the amount of the failed PET to the value of the estate and then follow through the normal IHT calculations the threshold for applying the reduced IHT rate will be increased and the whole estate will be taxed at the same rate (40% or 36%) regardless of whether the failed PET would have attracted taper relief.

It would seem logical to me (though this of course this doesn't mean it's the case!) to treat the taxation of the failed PET and the rest of the estate separately, with the PET tax governed by the taper relief rules and the rest of the estate taxed at 40% or 36% depending on whether charitable gift exceeds 10% of the estate (not counting the failed PET). In support of this I note that the reduced rate calculator depends only on the value of the estate excluding the failed PET value.

getmore4less

It's a while since I read the failed PET taper relief notes.

 I recall the taper relief in effect gives the estate a tax credit for the full amount even though a reduced rate is paid.

Worth going through HMRC IHT manual there are examples.

uknick

Jotiho

This link gives examples of taper relief calculations;

The Tapered Annual Allowance briefing note | Canada Life UK

Example 3 is what you're looking for.

The sequence for calculation is;

Calculate any IHT due on the PETs first, including any taper relief
Then, calculate the IHT due on the remaining estate.

For example,

Remaining estate at death £600k
Failed PETs £350k
Total estate is £950k

First, work out PET IHT due on £25k (£350k less £325 NRB, assuming no other NRBs)

Then calculate the IHT due on the other £600k.

With regard to who pays the tax on the PET, HMRC say it's the estate as it's dealt with as part of the Probate process.  But, this is on the HMRC website;

How Inheritance Tax works: thresholds, rules and allowances: Rules on giving gifts - GOV.UK (www.gov.uk)

"How Inheritance Tax on a gift is paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift."

As you can see it is contradictory in the same paragraph.  Typical HMRC trying to simplify the issue.

The general consensus on here, and other internet advice, is the estate pays it if there is enough left over.  Otherwise, the receiver.  Clearly you have some specific issues, so I think it might be best if you now take professional advice.

Jotiho

Thanks. The Canada Life link is very helpful. Pity it doesn't address the reduced rate issue!

In your example, do you think the threshold charitable gift for the lower (36%) rate to apply would be £60k or £95k?

Best regards

uknick

What reduced rate issue?  Are you referring to the charity related rate of 36%?

My view is that all failed PETs get added to the estate value.  After all, they form part of the tax calculation.