A transfer of BPR shares to a RPT must be a chargeable transfer. Clawback if the shares are sold and the settlor dies within 7 years is only for the purposes of additional tax: s113A (2).
So it has no effect on the original BPR for the CLT and does not affect his cumulation prior to the settlement. So if BPR was due at 100% and the settlor had a nil cumulation that would be his cumulation for calculating the rate of RPT charges on a distribution of the sale proceeds or at a TYA on them or their reinvestments.
The trustees have a potential exposure to additional rate IHT subject to taper on the actual value of the assets transferred without BPR and not not on the sale proceeds or their reinvestments at the date of death. What is the additional rate of tax if there is no charge on the transfer due to BPR. Is it the full rate of 40% over the NRB subject to taper?
I note, and agree, Jack’s comments on the amount of the settlor’s cumulation for IHT, but would observe that for any distribution within the first 10 years of the settlement any BPR applicable at the time of settlement is ignored when calculating the exit charge. s.68(5) requires that for the purposes of calculating the exit charge the value transferred into the settlement being is that the assets immediately after they became comprised in the settlement, at which point in time the trustees will not have held them long enough to qualify for BPR.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks Paul for that confirmation. IHTM14576, and the two examples that follow, is somewhat inscrutable, not referring either to APR/BPR or NRB on the original transfer so nil tax charged. Also s7 with s113A could have been more helpful but IHTA dodged the Tax Law Rewrite and its Step by Step approach.
The use of gross value before relief is not only a trap for the unwary but a potential opportunity. It is still possible to create multiple trusts each with a NRB on consecutive days if the transferor has a Nil Cumulation. Not related, or an addition let alone same-day. Gross value without relief settled in each. Stomach and purse for valuations and compliance costs required!
I still have difficult with the PET before the CLTs with BPR. Received wisdom of course is not to do them in that order but sometimes one is stuck with those facts. What is the effect of such a PET failing on the cumulation used in the rate calculation for RPT charges in ss. 66(3)(b) and 68 (4)(b). At the relevant time a chargeable event occurs, or worse has already occurred, It may have been nil but retrospectively becomes more than the NRB because the prior PET fails. Is the Cumulation revalorised at all and if so retrospectively?
There is no mention of this in s7 or s3A though the latter makes clear that the date of the transfer remains unchanged.
Where a PET is made within seven years of death followed by a CLT (gift into a RPT) the cumulative total affecting IHT charges on the RPT will be increased to the extent that the PET has become chargeable (hence better to make CLTs before PETs in such cases).
But what if the facts in reality are Year 1 PET of £500k, Y2 DT £325k Settled into DT with 100% BPR, Y3 sale of part of trust property and £150k distributed, Y4 Settlor dies, rest of property sold and CGT and IHT additional tax paid, Y10 £300k left.
What is the Settlor’s cumulation for RPT charge in Y3 (nil or £500k retrospectively!) and in Y10 (nil or £500k foreseeable)?
People do not always make their gifts in the optimum order, Malcolm!
Apologies if I am missing something here, but in year 3 there is no failed PET as the settlor is still alive, so the cumulation for the year 3 exit charge should be nil. In year 10 it should be £500k.
Maxine
TC Citroen Wells
I agree with both Maxine and Malcolm. I hope that this is indeed the effect of s3A(5). It is disappointing that IHTM does not provide more examples. IHTM42114 at Step 2 number 2 says: “the settlor had made potentially exempt transfers in the seven years prior to the start of the trust that had (before the proportionate charge) become chargeable transfers because of the settlor’s death.”. The throwaway 4 words in brackets seem to reflect s.3A(5) but an example, if not more expansive wording, would have provided a more lucid clue to HMRC’s view. Statutes and guidance should ideally say what they mean, and while the former cannot invariably be relied on for clarity, what is the point of guidance of the same degree of trustworthiness (though no surprise, given its provenance)?
IHTM42090 deals with additions and adjusting the settlor’s cumulation. To be an addition: “the transfer must be a chargeable transfer. Potentially exempt transfers (PETs) are not chargeable transfers unless the settlor dies within 7 years”. Only a living settlor can make an addition within s67 and it must therefore be assumed,if a PET, to be exempt at the time and not a chargeable transfer for s.67(1). So what on earth does " unless the settlor dies within 7 years" mean? A possible retrospective addition? How can a PET ever be an addition to an RPT? There is no need to refer to a PET here at all.
A PET is a TOV so although it is apparently capable of being a same day addition within s62A in fact it can only be a chargeable transfer since outside s3A. So never an addition either.
So we have a superfluous and misleading reference to a PET in 42090 and one that is barely explicit in 42114 where it needs to be the opposite.
Why does HMRC not invite suggestions for improvement in its guidance? I have never received a reply to an entry in the “Report a Problem” box on a guidance page.