Next, we need to reassess the £75,000 CLT made in year nine. Looking back seven years, we only need to bring in the year-seven gift (the failed PET to Jill). The year-four PET to Jack is now exempt, and the year-one CLT was made more than seven years previously. The total of the year-seven and year-nine gifts is £125,000 – well under the nil-rate band of £325,000.
Therefore, the trustees of the discretionary trust have no further tax to pay on the year-nine CLT.
The transfers made in years one and four do not need to be revisited because they were made more than seven years before death.
What is the tax?
The total IHT payable is £172,000 (£170,000 plus £2,000).
Had the gift to Jill in year seven been limited to £25,000 there would have been no tax on it, but then there would have been an extra £25,000 in the estate. Ignoring growth, this would have resulted £10,000 additional tax.
However, if the gift to Jill had been delayed by a year it could have avoided tax altogether by ensuring there was more than seven years between the gift to Jill and the original £300,000 gift into trust.
Of course, this must be balanced against the likelihood of the client surviving the gifts by seven years – the earlier a gift is made, the sooner it will be outside the estate altogether.
Additional factors
This example can be expanded to briefly look at some of the other factors that come into play.
For example, if Alec had been widowed a number of years ago and if his late spouse had used none of their nil-rate band on their death, it would be available for Alec when calculating the IHT on his estate and when going back over each of the lifetime transfers.
There would have been no tax on the estate because the total nil-rate band (including the RNRB) is £1m compared with the estate value (including lifetime gifts) of £925,000.
With regards to the two gifts in years seven and nine that became chargeable on Alec’s death, a nil-rate band of £650,000 would have been available for each retrospective calculation on death, and so there would have been no further tax on these either.
In fact, there would have been scope to make a larger gift to Jill.
No ‘one size fits all’
It is important to stress that the 14-year rule does not automatically rule out gifting just because a gift was made into a discretionary trust within seven years of a later gift.
