My client has a Will that leaves 10% of his estate to charity. He has just made significant PETs in excess of the NRB.
We are planning for the future and need to estimate the potential liability for IHT on death. However, I am struggling to find clear direction as to whether or not the tax rate that applies to the PETs, in the event that the client dies and they fail now, would be 40% or 36%.
Logic suggests that it is 40%, but I have not been able to find anything that looks definitive. Can anyone point me in the right direction or help me translate the legislation?
Investec Wealth & Investment
The 36% rate would only apply to the transfer of the estate on death, not to the failed PETs which would taxed at 40% where they exceed the NRB (before tapering).
The 36% rate legislation is enacted as Schedule 1A of IHTA 1984. This commences with:
“1(1)This Schedule applies if—
(a) a chargeable transfer is made (under section 4) on the death of a person…”
and section 4 of the Act applies to “Transfers on death” - so lifetime transfers are therefore excluded from the lower rate.
Capital & Professional Consulting Limited
Funnily enough, I have just had exactly the same issue assessed by HMRC and they confirmed that the IHT on failed PET’s is at 40% and not 36%.
Nicola Waldman | Partner | For Hodge Jones & Allen Solicitors
confirms that you use the rate applicable on death – so in this instance 36%.
PETs which fall in to charge are not part of the estate for the deemed transfer on death (strictly, the donees of the gifts are the ones liable to the tax). The reduced rate of IHT applies to transfers on death only. Therefore the reduced rate of IHT cannot apply to failed PETs (or lifetime chargeable transfers). You could refer your client to IHTA 1984 Sch1A (dealing with the reduced rate) at para 1(1), which states that the schedule applies if “a chargeable transfer is made (under section 4) on the death of a person”.
New Quadrant Partners Ltd
I’m very interested in Nicola saying HMRC have recently confirmed a 40% rate to her, and Mark’s explanation also seems pretty clear. But the IHT manual reference provided by Kim seems to contradict these?
Investec Wealth & Investment
Kim. I wonder if this entry is addressing the potential situation that the rate of IHT might be changed between the transfer and death? e.g. you make a transfer today when 40% rates apply but between now and death the govt increase the rate to 45% (say). This provision would allow you to apply 40% as the rate upon death for the failed PET, with 45% (or a reduced rate courtesy of 10% charitable transfers) applying to the estate.
Unfortunately I can’t find any corresponding provision in the Act at present so I’ll pose this as a question.
Sch 1A does seem pretty clear cut as regards applying to the transfer on death only though!
Capital & Professional Consulting Ltd