Failed PET and reduced rate calculation

Jotiho

By the reduced rate issue I do mean the 36% rate that applies when 10% of the estate “baseline value” is gifted to charity. In most cases the baseline value is the net estate after expenses et cetera.

Thinking of the tax on the failed PET, if the original transfer was, for example, between three and four years before the death then taper relief will apply, effectively reducing the rate from 40% to 32%. If the estate gifts more than 10% of the baseline value to charity, is the applied rate further reduced? If so, by how much and does the baseline value include the value of the failed PET or not?

My intuition is that

1. Gifts to charity from the estate (not including any failed PET) play no part in the calculation of tax on the PET; and

2. The threshold for applying the 36% rate to the rest of the estate is 10% of its value not counting the PET.

I’d be interested in your thoughts. I admire your stamina in sticking with the issue!

I will be taking professional advice and will post the results here in due course.

Best regards

uknick

I'll repeat, the 10% threshold is applicable to the net value of the estate.  That will include failed PETs.  So, no, they're not ignored.

The IHT rate then applied to the estate will be the relevant rate after the charitable donation is deducted. 

Jotiho

In this formulation, how does taper relief apply (if the PET was given between 3 and 7 years), and if the charity threshold is reached so the lower 36% rate applies to the estate as a whole does the taper reduction apply on top of this?

uknick

Taper relief for 3 to 7 years?  Could you narrow that down as it could be, 20%, 40%, 60% or 80% of the IHT due.

I think you're overthinking this.  The first thing to do is work out the IHT rate for the estate.  Then, apply this rate to the PET and work out the actual IHT due on the PET.  Then. apply the estate IHT rate to the rest of the estate.

But, from your last question, may I assume this is all hypothetical?  If not, you would know the taper relief rate.

Jotiho

Thanks for sticking with it! I'll try and be specific. Suppose there is a failed PET of 400k and the rest of the estate comes to 500k making a total value of 900k. If the will gives 90k (or more) to charity, the estate qualifies for the reduced rate of IHT 36%. My first question is whether this reduced rate applies to the failed PET? I think your latest post suggests that it does, in which case 144k (0.36 x 400) IHT will be payable on the PET. If the PET was made between three and four years before the death it will qualify for taper relief of 20%. My second question is whether this applies on top of the reduced rate, bringing the IHT payable on the PET down to 115.2k (0.8 x 144). Do you think that's right?

uknick

Yes to both your questions.