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On the transfer list

The Budget was low on shocks but let us not forget what went before. Considered as a whole, the pre-Budget report, the Budget and everything in between have delivered quite fundamental change. Just because it did not all get announced on one day does not make it any less important.

One of the “in between” things was the issue of draft regulations on excepted transfers. The draft regulations, effective from April 6, 2007, were published on February 5 and the final Inheritance Tax (Delivery of Accounts) (Excepted Transfers and Excepted Terminations) Regulations 2008 were issued on March 6.

These increase the limits that determine whether a chargeable transfer must be reported to HM Revenue & Customs. As discretionary trusts have become more popular since March 2006, this issue is of importance.

Previously, no account had to be sent to HMRC where the value transferred by chargeable lifetime transfers made by an individual in any tax year did not exceed £10,000 and the aggregate cumulative value transferred by all CLTs in the past 10 years did not exceed £40,000. Special limits applied on the termination of an interest in possession.

As regards periodic and exit charges arising under a relevant property trust, that is, a trust subject to the IHT discretionary trust regime, an account had to be completed when such an event occurred, regardless of the amount involved and whether any tax was due. The only exception to this rule was where, broadly, a trust’s sole asset was cash of less than £1,000.

Under the new rules, no account has to be delivered when the CLT is an excepted transfer. Whether a CLT will be an excepted transfer will depend on the nature of the assets being gifted.

Cash and quoted stocks and shares
For a transfer of cash and quoted stocks and shares to be an excepted transfer, the cumulative total of all CLTs made by the transferor in the seven years preceding the current transfer, but including the current transfer, must not exceed the nil-rate band for the year of transfer.

Assets other than cash and quoted stocks and shares
For a transfer of assets other than cash and quoted stocks and shares to be an excepted transfer:

  • The value of the current transfer plus the cumulative total of all CLTs made by the transferor in the seven years preceding the current transfer must not exceed 80 per cent of the nil-rate band (currently £240,000) and
  • The value transferred by the transfer of value giving rise to the chargeable transfer must not exceed the nil-rate band less any CLTs made by the transferor in the seven years preceding the current transfer. In this connection, the value transferred by the transfer of value giving rise to the CLT is the loss to the transferor’s estate.

    For example, assume that Jack makes a gift of land on March 23, 2008 which gives rise to a transfer of value of £76,000. If Jack has not otherwise used this year’s and last year’s annual exemption, the CLT is £70,000. CLTs made by Jack in the preceding seven years total £100,000. If one applies the two tests, the current CLT of £70,000 does not need to be reported because:

  • The cumulative total is £170,000 which is less than £240,000 and
  • £76,000 is less than £200,000, that is, the nil- rate band (£300,000) less the CLTs made in the preceding seven years (£100,000).

    In HMRC’s guidance notes issued on March 7, it has helpfully dealt with insurance-linked products, including discounted gift trust schemes. It confirms that the value transferred will be the discounted value and that, in its view, the value will be attributable to cash if the transferor makes a transfer where he pays an amount in cash or by cheque/bank transfer and he then needs to take no further action to complete the transfer and cannot stop any further steps required to complete the transfer from taking place.

    This will usually be the case when the insurance product and related trust documentation are all completed at the same time and the bond placed in trust from outset.

    On the other hand, if a bond is purchased first and subsequently placed in trust, the non-cash 80 per cent limit will apply.

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