These are two topics which can cause great puzzlement to executors and administrators. The recent Government report is worth quoting at length on both these topics.
Taper relief is complicated and not well understood
The tapered rate of Inheritance Tax on lifetime gifts is poorly understood. The OTS has heard that advisers find it difficult to explain taper relief to clients and that many individuals intuitively expect or understand the relief to work in an entirely different way.
One common misconception is that taper relief applies to all gifts. The OTS has heard that many individuals do not understand that taper relief will apply only to those later gifts which take the total of the gifts over the nil rate band.
The Existence of a “14 year rule” is Surprising
It is quite well understood that Inheritance Tax may be payable on gifts made within 7 years of death. However, it is not generally understood that to allow executors to identify the gifts on which tax may be payable, they may need to consider gifts made up to 14 years before death.
It becomes necessary to look back up to 14 years before death when, for example, there has been a lifetime gift made into trust followed by a lifetime gift to an individual, after which the person who had made the gift dies within 7 years. This is because in considering the amount of nil rate band available at the date of the gift, regard must be made to the amount already utilised against chargeable lifetime transfers in the 7 years before the date of the gift concerned.
December 2009 – Ellen makes a gift of £325,000 into trust
January 2013 – Ellen made a gift of £20,000 to Trisha
March 2018 – Ellen dies
To calculate the Inheritance Tax on the gift made to Trisha in January 2013, any gifts into trust made in the preceding 7 years must be considered.
The gift into trust made in December 2009 used all the nil rate band and so Inheritance Tax of £8,000 is payable on the gift to Trisha (ignoring taper relief)