A chargeable lifetime transfer (CLT) is a gift made during your lifetime that attracts an immediate inheritance tax liability. Unlike other types of gifts, CLTs are taxable straight away, so they’re an important consideration for estate planning. In this article we’ll explain what constitutes a CLT, the tax implications and how to manage and reduce your inheritance tax bill.

Key Points of Chargeable Lifetime Transfer

• Chargeable Lifetime Transfers (CLTs) are taxed immediately at the current tax rate, regardless of the donor’s life expectancy, so they’re key to estate planning.
• The nil-rate band applies to CLTs, so a portion of the estate can be transferred without inheritance tax and requires careful management of multiple transfers to use up the exemptions.
• Using exemptions, reliefs and timing of transfers can reduce the tax on CLTs and overall estate planning.

What Are Lifetime Transfers?

Lifetime transfers refer to the transfer of assets from one person to another during the original owner’s lifetime. These transfers play a significant role in estate planning and can impact inheritance tax. Lifetime transfers can be categorized into two main types: Chargeable Lifetime Transfers (CLTs) and Potentially Exempt Transfers (PETs).

CLTs are immediately chargeable to Inheritance Tax (IHT), meaning they attract an immediate tax liability. On the other hand, PETs are not immediately chargeable to IHT but can become exempt if the donor survives for seven years after making the transfer. Understanding the distinction between these two types of transfers is crucial for effective estate planning and managing inheritance tax liabilities.

Types of Lifetime Transfers

There are several types of lifetime transfers, each with its own implications for inheritance tax and estate planning. These include:

• Gifts: Outright transfers of assets, such as cash or property, to another individual. These can be either CLTs or PETs, depending on the nature of the gift.
• Trusts: Setting up Trust and Transferring assets into a Trust can be an effective way to manage and minimise inheritance tax. Trusts can be structured in various ways to suit different estate planning needs.
• Assets: This includes transferring ownership or control of assets, such as businesses or investments, to others during one’s lifetime. This can help in reducing the taxable value of the estate.
• Cash Savings: Transferring cash savings to another person or entity.
• Your Home or Any Properties You Own: Transferring ownership of real estate properties.
• Business Property: Transferring business properties and their associated assets.
• Businesses and Their Assets: Transferring ownership or control of a business and its assets.
• Life Assurance Policies: Policies that are not payable into a Trust.
• Investments: Transferring investment portfolios or individual investments.

Understanding the different types of lifetime transfers and their tax implications can help you make informed decisions and optimise your estate planning strategy.

What Are Chargeable Lifetime Transfers?

Chargeable Lifetime Transfers (CLTs) are gifts made during an individual’s lifetime that are taxed immediately. Unlike potentially exempt transfers (PETs) which can become exempt if the donor survives for seven years, CLTs are always taxed regardless of the donor’s life expectancy. This immediate taxability makes CLTs an important consideration in estate planning especially when considering a lifetime gift and lifetime gifts.

Common examples of CLTs are gifts to discretionary trusts, gifts to companies and other transfers of value. For example, putting assets into a discretionary trust is often seen as an estate planning tool, but it’s a CLT and is taxed immediately for IHT purposes. Gifts made into a relevant property trust are also considered CLTs and are subject to immediate IHT. Knowing which transfers are CLTs helps you structure your estate better.

CLTs aim to reduce the overall inheritance tax bill. Making these transfers during your lifetime allows you to manage the estate’s taxable value. This proactive approach helps with tax planning and ensures assets are used as intended.

Immediate Tax on CLTs

When making a chargeable lifetime transfer, immediate inheritance tax liability applies. If the value of the CLT exceeds the nil-rate band, 20% tax applies to the excess. This tax is usually paid by the donor at the time of transfer.

Gifts made to the same person in a given year must be summed up when determining the impact on the available annual gift allowance.

For CLTs that don’t exceed the nil-rate band, there may be a lower rate of tax, around 20% on the transfer. And any lifetime IHT paid can be credited if the transfer is subject to further IHT on the donor’s death. Knowing these immediate tax implications is important for estate planning.

The Nil-Rate Band and CLTs

The nil-rate band is a key part of estate planning as it’s the amount of the estate that can be transferred without IHT. For chargeable lifetime transfers (CLTs) the nil-rate band applies to the whole of the donor’s estate during their lifetime. So any chargeable lifetime transfers above this band will be taxed on the amount above the band.

If multiple CLTs are made, the nil-rate band is allocated in chronological order, from the first gift to the last. This is important because the total value of CLTs made in the previous seven years can reduce the available nil-rate band for current gifts. You need to plan carefully to maximise the nil-rate band and minimise tax. Additionally, surplus income can be used to make regular gifts without affecting the nil-rate band.

Assets in CLTs

A wide range of assets can be included in chargeable lifetime transfers so it’s important to know which assets are eligible. These can be cash savings and real estate to business interests and investments. For example, transferring ownership of a family home or a significant investment portfolio is a CLT and is taxed immediately.

Business properties and their assets are also CLTs, including relevant property trusts. This means not just the physical property but the business interests associated with it.

Knowing what assets are in CLTs allows you to choose which assets to transfer and optimise tax.

Who Pays the Tax on CLTs?

The tax on a chargeable lifetime transfer is usually paid by the donor at the time of transfer. So if you make a CLT you pay the IHT immediately.

But if the donor dies after making a CLT, the responsibility for paying the IHT transfers to the trustees of the trust or the recipients of the gift. Both the transferor and the trustees can settle the IHT on CLTs so there is some flexibility in the tax obligations.

Planning for CLTs

Planning is key to optimising the tax on chargeable lifetime transfers. Timing is everything; transferring assets earlier can reduce the taxable value of the estate if the transferor survives for seven years post-transfer. Planning CLTs well in advance will benefit your estate big time.

Choosing the right assets for CLTs is another strategy. Low value or rapidly appreciating assets are good to transfer as they will optimise the tax. Using the annual exemption wisely will also enhance tax efficiency as it’s applied to the first transfer when multiple gifts are made in the same tax year. Additionally, ‘wedding gifts’ of up to £5,000 to children can be made without affecting the nil-rate band.

Seeking professional financial advice can also be helpful. Financial advisors can navigate the complexities of CLTs and IHT. Using financial planning tools such as IHT and taper relief calculators will help you evaluate the tax implications of gifts during your lifetime.

The Seven Year Rule and CLTs

The seven year rule is a key consideration in estate planning for chargeable lifetime transfers. If the donor dies within seven years of making a CLT the value of the transfer is included in the estate for IHT purposes. This means the IHT rate if the donor dies within seven years of making a CLT can be 40%.

Other estate assets may also increase tax liability if the donor dies within seven years of making a CLT. Some donors take out a seven year term life insurance policy to cover potential IHT liabilities.

Understanding the seven year rule and CLTs is key to estate planning.

Exemptions and Reliefs for CLTs

Using exemptions and reliefs will reduce the IHT on chargeable lifetime transfers. For example the annual gift allowance can be used to make smaller gifts that are IHT free. This is a useful tool to reduce the taxable value of your estate over time.

Transfers of certain agricultural properties can be fully exempt under agricultural property relief if certain conditions are met. Business property relief can also apply to companies where at least 80% of the assets are used for the business and will give significant tax relief.

These exemptions and reliefs are key to your estate planning strategy.

Business Property Relief (BPR)

Business Property Relief (BPR) is a valuable relief that can significantly reduce the inheritance tax liability on the transfer of business properties. BPR is available if a donor makes a transfer of a relevant business property, as defined in Section 105 of the Inheritance Tax Act 1984. Examples of relevant business properties include:

• Shares in an unlisted trading company owned by the donor for at least two years.
• Shares in a quoted trading company, provided the donor has voting control of the company.
• Gifts of land and buildings, and plant and machinery, where those assets are used by the donor’s partnership or by a company which he/she controls.

BPR can reduce the transfer of value for IHT purposes by either 50% or 100%, depending on the type of business property. This relief is a crucial tool for business owners looking to pass on their business assets while minimizing inheritance tax.

Agricultural Property Relief (APR)

Agricultural Property Relief (APR) works similarly to BPR, providing significant tax relief on the transfer of agricultural properties. APR can reduce the transfer of value for IHT purposes by either 50% or 100%. Examples of agricultural properties that qualify for APR include:

• Farmland and farm buildings used in the donor’s business.
• Tenanted land and buildings let prior to 1 September 1995, with more than two years to run at the date of transfer.

APR is an essential relief for those involved in agricultural businesses, helping to ensure that the transfer of agricultural properties is tax-efficient and sustainable for future generations.

By understanding and utilizing these types of lifetime transfers and the associated reliefs, you can effectively manage your estate and reduce your inheritance tax liabilities.

PETs vs CLTs

Understanding the difference between potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs) is important for estate planning. A potentially exempt transfer (PET) refers to specific types of lifetime gifts or asset transfers that may qualify for exemptions from inheritance tax (IHT) based on the donor’s survival period post-gift. For a PET to remain exempt from IHT, the donor must survive for seven years after making the transfer. Unlike PETs, CLTs do not require the donor to survive for any period to avoid IHT. CLTs are IHT liable immediately and regardless of the donor’s lifespan, highlighting the importance of understanding the PET rules.

Planning around the order of gifting can affect IHT outcomes. For example, gifting CLTs before PETs will protect the nil rate band from being used up. This will help manage tax liabilities better and ensure your estate is used as you want it to be.

Taper Relief on CLTs

Taper relief is a useful tool to reduce the tax on a chargeable lifetime transfer based on the donor’s survival time after the gift. The taper relief scale reduces the tax liability based on the time between the gift and the donor’s death. So the longer the donor survives after the CLT the lower the tax liability.

However taper relief only applies if the transfer of value occurs more than three years before the donor’s death. If death occurs within three years taper relief does not apply to gifts that are IHT chargeable immediately.

Understanding taper relief and CLTs will help your estate planning.

Gifts with Reservation of Benefit

A gift with reservation is when an asset is transferred but the donor continues to benefit from it, for example living in a gifted property. If a gift with reservation exists at the time of the donor’s death the value is included in the estate for IHT purposes. To avoid this the donor must give up all benefit of the gifted asset.

One way to get rid of the reservation of benefit is for the donor to pay full market rent for the use of the gifted property. This will mean the gift is not included in the estate for IHT purposes.

Understanding the rules for gifts with reservation of benefit is key to estate planning and IHT management.

IHT Management

IHT management requires a strategic approach to lifetime transfers and PETs. Any IHT paid in the last seven years will be deducted. This will be off the final bill. So planning ahead and making strategic CLTs will reduce the tax on your estate.

If the donor pays the tax on a CLT it reduces the value of their estate for IHT purposes. You are taxed until October 2023. Double charging relief means only one IHT charge applies.

Using these strategies and exemptions will manage IHT liability and ensure your estate is used as you want it to be.

Conclusion

In summary understanding chargeable lifetime transfers is key to estate planning. By making strategic CLTs, using exemptions and reliefs and planning around the seven year rule you can reduce your IHT liabilities. Chargeable lifetime transfers is a proactive way to manage your estate and your assets.

Remember professional financial advice will help you through the IHT and estate planning maze. With the right planning in place you can secure your loved ones’ financial future and have peace of mind.

FAQs

What is a chargeable lifetime transfer (CLT)?

A chargeable lifetime transfer (CLT) is a gift made during a person’s lifetime that is IHT chargeable immediately. You should consider the tax implications of such transfers when planning your estate.

How does the nil-rate band affect CLTs?

The nil-rate band affects chargeable lifetime transfers (CLTs) by allowing part of the estate to be transferred tax free. Any CLT above the nil-rate band will be IHT on the excess.

Who pays the tax on a CLT?

The donor pays the tax at the time of the transfer in a CLT. But if the donor dies after the transfer the trustees or recipients will pay the tax.

What is the seven year rule?

The seven year rule states that if a donor dies within seven years of making a charitable lead trust (CLT) the value of the transfer will be included in their estate for IHT purposes and could be up to 40% tax. So you need to consider this timing when making charitable donations.

What is taper relief?

Taper relief reduces the tax on a chargeable lifetime transfer (CLT) based on how long the donor survives after the gift. The longer the donor survives the less tax is due on the transfer, on a sliding scale.