Where multiple PETs have been made followed by a CLT into discretionary trust in the following tax year, is the position that the full NRB is available for the gift into trust before any lifetime inheritance tax would be payable, as the PETs would only become a chargeable transfer if the donor dies within 7 years?
Additionally would HMRC need to be informed of the PET if the CLT made in the following tax year would mean that the cumulative total of all the gifts would exceed the NRB? And what would the consequences of this be?
While the donor of a PET is alive it is assumed to be exempt: s.3A(5) IHTA. Therefore it does not form part of the donor’s cumulation as regards a chargeable event occurring subsequently while the donor is still living. But if the donor dies within the 7 year period following the PET it becomes chargeable and its value is treated as cumulating and as having the same effect on those later chargeable events as if it had been initially chargeable.
The first relatively minor adjustment is that the chargeable value of the PET will be reduced by any available annual exemption at the date of gift. A complication if other gifts were made in the same or next tax year. The AE may have to be reallocated to the PET and taken from another chargeable gift. This is the only time HMRC need to be told about a PET occurring: it is not reportable as such but HMRC will charge the other gift as if the PET attracted all or part of the annual exemption despite its not being chargeable at that point and even if it never becomes so. See IHTM14511.
A more substantial adjustment may be required because initially the PET will not have absorbed any of the donor’s NRB then available. That requires one to ascertain whether there are any other failed PETs in the preceding 7 years because they will have to absorb that NRB in priority to the later failed PET: IHTM14514.
The failed PET, or all of them, will first be allocated with the donor’s NRB in the amount prevailing at the date of death. If there is no surplus not only will the PET(s) be chargeable in their own right but the death estate will be taxed at 40%. There will also be a knock-on effect on other lifetime chargeable gifts made by the donor. His cumulation at the time they were made would have been calculated on the basis that PETs made in the previous 7 years did not immediately absorb NRB.
As regards outright CLTs this will affect the additional tax charge on death, the same timing of charge as that on the PETs. So no practical problem about assessing tax retrospectively.
However, the donor’s cumulation at the moment before settling is an essential component of the RPT charges. If a settlor makes an RPT he may initially have a full NRB. That will be used in all future calculation of RPT charges. But if it transpires that he has made a failed PET that cumulation must be revised. The trustees need to know that but, as long as they do, they will have to accept that future charges will bear more tax than initially expected. What about chargeable events that have already occurred on the assumption of a lower or nil cumulation of the settlor? The only limit on the recovery of any additional tax is set out in s.240 IHTA, so 4 years if no one chargeable has been naughty.
It is an integral part of IHT gift planning that if possible gifts are made in an order which will avoid the problem for RPTs. Ideally a settlor will set up an RPT before making any PETs, so that trustees will know they can rely on his cumulation being fixed (and if he makes later gifts, PETs or CLTs, he should avoid later additions to an RPT). At the very least trustees of an RPT should be made aware of the risk of settlor’s cumulation being altered by failed PETs.