Chargeable Lifetime Transfers (“CLTs”) are another important aspect of Inheritance Tax (IHT) planning. Unlike Potentially Exempt Transfers (PETs), certain lifetime gifts are immediately chargeable to IHT, meaning a tax liability may arise when the gift is made.
Understanding when a gift is a CLT and the potential tax implications is essential when considering estate planning.
What is a CLT?
A Chargeable Lifetime Transfer generally arises when an individual makes a lifetime gift into most types of trust, such as a discretionary trust. As the beneficiaries are not absolutely entitled to the trust assets, these transfers do not qualify as Potentially Exempt Transfers.
The value of the gift is immediately assessed for IHT purposes and is a chargeable transfer at the date it is made.
Immediate Inheritance Tax Charge
When a CLT is made, its value is added to any chargeable lifetime transfers made by the donor in the previous seven years.
If the cumulative value of those transfers exceeds the available nil-rate band (currently £325,000), an immediate IHT charge may arise.
Where the donor pays the tax, the lifetime rate is generally 20% on the value above the available nil-rate band. If the trustees agree to pay the tax instead, the effective rate is higher because the tax is calculated on a grossed-up basis.
What Happens if the Donor Dies Within Seven Years?
If the donor dies within seven years of making a CLT, the transfer is reassessed using the death rate of IHT (currently 40%).
Any lifetime tax already paid is credited against the final liability, and additional tax may become payable.
As with PETs, taper relief may reduce the amount of tax payable if the donor survives for at least three years after making the gift. However, taper relief reduces the tax payable, not the value of the gift.
Common Examples of CLTs
Examples of Chargeable Lifetime Transfers include:
- Gifts into discretionary trusts.
- Transfers into certain interest in possession trusts.
- Some transfers into accumulation and maintenance trusts, depending on the trust’s terms and the date it was created.
The tax treatment of trusts can be complex, and the type of trust used will determine the applicable IHT rules.
Points to Consider
Before making a Chargeable Lifetime Transfer, individuals should consider:
- Whether an immediate IHT liability could arise.
- The availability of the nil-rate band and any previous chargeable transfers made within the last seven years.
- The Capital Gains Tax implications of transferring assets into trust.
- The ongoing IHT regime that may apply to trusts, including ten-year anniversary charges and exit charges.
- Taking professional advice to ensure the trust structure is appropriate for their estate planning objectives.
Final Thoughts
Chargeable Lifetime Transfers can be an effective estate planning tool, particularly where trusts are being used to protect family wealth or provide for future generations. However, the IHT rules governing trusts are significantly more complex than those applying to outright gifts.
Professional advice should always be sought before establishing a trust or making a Chargeable Lifetime Transfer to ensure the most appropriate structure is used and to avoid unexpected tax consequences.